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This week we got another strong week out of the market that had its excitement faded when Moody's downgraded the US Debt from AAA to AA1. In the simplest breakdown -- Moody's cited the escalating $36 trillion debt, persistent fiscal deficits and rising interest costs on the debt. The agency expressed concern over the lack of effective measures by the Biden and now the Trump administration and Congress to reverse these trends, projecting the federal debt could reach 134% of GDP by 2035. While they downgraded the overall credit, they maintained a stable outlook due to the US economy's resilience and the US dollar being the global reserve currency. The thing that is NOT a surprise about this move, is that Moody's placed the US on "rating watch negative" back in May '23. Is any of that priced in? The last two occurrences of US downgrades happened in August '23 and August '11. I go over both of these scenarios below, they both did lead to market pullbacks after strong runs which has me in a more defensive mindset to start the week.
Sometimes the market looks for an excuse to pullback. Markets sold as soon as this news hit the tape. The SPY is up 15% in 20 sessions while the QQQ is up 20% in that time. It would make sense for the market to pullback a bit and test buyers. How I plan on handling this is to watch for consolidation to build in the strongest names that have been running (HOOD, PLTR, CRWV, HIMS to name a few) and look to buy for swings when they re-setup. I think this debt downgrade is perfect for those who have been on the sidelines and looking for an entry into this market. I am looking to buy weakness and pullbacks. We are elevated heading into the week though and could spend this week pulling back. If we get a retest of the 200sma, I will look at that as a huge buying opportunity.
The reason I personally think this debt downgrade will be different from the previous 2 is my personal belief that we've seen the worst regarding tariffs. This part is all speculation on my end, so take it with a grain of salt. But the market shock that sent us lower so quickly was when we had placed ridiculous tariffs on every part of the world. That was a black swan event that I believe gets controlled as this administration is clearly staring at the stock market every day and trying to elevate stock prices. This leads me to believe they get focused on handling these tariff negotiations so we won't experience another shock while passing a tax bill that will be a positive event for stocks.
Interesting week ahead!
Let's get into the report.
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