05/19/25
It was another very strong day for stocks on Friday, and it capped off a very good week. But that's not the headline this Monday morning. After the bell of Friday Moody's announced a cut in the U.S. credit rating. It was the first time they had done so since they began the rating it in 1919.
I have started writing this commentary on Sunday afternoon so I am not sure how the stock market is reacting. The overnight futures may be open before I am finished and I may be able to post an update, but it looked like the the futures on Friday evening did react quite negatively, but let's see if the weekend pause cleared anything up.
Update: The S&P 500 futures did open lower on Sunday evening, but less than 1% in the first hour.
As we know, everything has become political, and if Trump is involved it is magnified, so let's get some of the sticky stiff out of the way. Here's some facts.
Mark Zandi is the top economist at Moody's and yes, he has been very critical of Trump's economic policy proposals. From what I read he is a registered democrat who has donated to many candidates over the year, but he apparently also supported republican John McCain in the 2008 race so... whatever.
Let's also remember that Moody's is now the last of the top three rating agencies to drop the U.S.'s credit rating, so this is not all that surprising. Standard & Poor's (S&P) dropped the rating in 2011, and Finch lowered it in 2023.
So now all three agencies have the U.S. credit rating at the second highest level. Is this a concern? Yes. Is it a catastrophe? No. Is it warranted? Most likely. I mean there are very few people in Washington, DC who have the courage to tackle the national debt and deficit issue.
I'm not smart enough to know how it all works, but that's not my angle here. My concern is the impact this will have on the stock market, and mostly in the short-term. Let's take a look at what happened during the prior credit rating cuts.
In August of 2011 Standard and Poor's cut the U.S.'s credit rating and the stock market was falling prior to the announcement, and in fact only a day later the S&P 500 made a low that held for another two months before a successful retest in October. It wasn't a great ride, but it wasn't terrible.
In 2023 Finch ratings lowered the U.S. from a top AAA rating to the 2nd best rating, AA+. That didn't go quite as well as stocks pulled back from a summer rally and nearly three months later the S&P 500 finally bottomed. That was more than a 10% decline from August 1 to the low in October.
There was another downgrade back in 2013 by Dagong Global Credit, but the reaction was mostly a yawn.
The Moody's downgrade comes just as I was going to address the open gap on the weekly chart of the S&P 500 - a very rare event. I went back many years and didn't see any noticeable open gaps on the weekly chart, but here is a more recent two year chart showing a small gap back in 2024. Again, it wasn't large but it did get filled in the first week in August or about three month later.
The current open gap has two potential targets. One is the close from the Friday before, or May 5, which was 5660. The other would be considered filled if that week's high of 5720 is retested. Either one would be a steep pullback from this past Friday's closing price of 5958.
The market lured in investors for weeks after bottoming on April 7th and basically going straight up since the 4-day pullback that ended on April 21. Now that it dragged in enough reluctant bears, it may be ready for a little volatility and perhaps punish the chasers. It could be a quick shake out or a long correction. We have seen both in the past after a credit rating cut.
We should see volatility in stocks, yields and the dollar today, but how much of this news has already been priced into these markets?
The S&P 500 (C-fund) has so much going on in the 5650 area that it seems like a very reasonable spot for a target while the index does some overbought house cleaning. Of course the surprise reaction could be a very minor reaction, but the chart does have several potential downside targets for a pullback, including the bottom of the blue open gaps, one also being in that 5650 area..
The DWCPF (S-fund) has been riding the bullish wave for several weeks now, but if the lowered credit rating pushes yields meaningfully higher, small caps may lose some of their recent luster. Lower interest rates helps smaller companies, not higher, so they may be the first to be sold on any perceived credit issues.
ACWX (I-fund) has been the leading TSP fund this year, but just a note of caution. Even though the credit rating has been dropped in the US and not the I-fund counties, when Finch dropped the U.S. credit rating in 2023, the dollar took off like a rocket. That's not typically good news for the I-fund, and it wasn't back the summer of 2023.
BND (bonds / F-fund) has remained in the current trading range for months now. I took a look back at this chart from back in 2023, and while it did trend lower after the Finch downgrade, it was a little choppier than the straight up rally in the dollar.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Questions, comments, or issues with today's commentary? We can discuss it in the Forum.
Daily Market Commentary Archives
For more info our other premium services, please go here... www.tsptalk.com/premiums.php
To get weekly or daily notifications when we post new commentary, sign up HERE.
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We may use additional methods and strategies to determine fund positions.
It was another very strong day for stocks on Friday, and it capped off a very good week. But that's not the headline this Monday morning. After the bell of Friday Moody's announced a cut in the U.S. credit rating. It was the first time they had done so since they began the rating it in 1919.
| Daily TSP Funds Return
More returns |
I have started writing this commentary on Sunday afternoon so I am not sure how the stock market is reacting. The overnight futures may be open before I am finished and I may be able to post an update, but it looked like the the futures on Friday evening did react quite negatively, but let's see if the weekend pause cleared anything up.
Update: The S&P 500 futures did open lower on Sunday evening, but less than 1% in the first hour.
As we know, everything has become political, and if Trump is involved it is magnified, so let's get some of the sticky stiff out of the way. Here's some facts.
Mark Zandi is the top economist at Moody's and yes, he has been very critical of Trump's economic policy proposals. From what I read he is a registered democrat who has donated to many candidates over the year, but he apparently also supported republican John McCain in the 2008 race so... whatever.
Let's also remember that Moody's is now the last of the top three rating agencies to drop the U.S.'s credit rating, so this is not all that surprising. Standard & Poor's (S&P) dropped the rating in 2011, and Finch lowered it in 2023.
So now all three agencies have the U.S. credit rating at the second highest level. Is this a concern? Yes. Is it a catastrophe? No. Is it warranted? Most likely. I mean there are very few people in Washington, DC who have the courage to tackle the national debt and deficit issue.
I'm not smart enough to know how it all works, but that's not my angle here. My concern is the impact this will have on the stock market, and mostly in the short-term. Let's take a look at what happened during the prior credit rating cuts.
In August of 2011 Standard and Poor's cut the U.S.'s credit rating and the stock market was falling prior to the announcement, and in fact only a day later the S&P 500 made a low that held for another two months before a successful retest in October. It wasn't a great ride, but it wasn't terrible.
In 2023 Finch ratings lowered the U.S. from a top AAA rating to the 2nd best rating, AA+. That didn't go quite as well as stocks pulled back from a summer rally and nearly three months later the S&P 500 finally bottomed. That was more than a 10% decline from August 1 to the low in October.
There was another downgrade back in 2013 by Dagong Global Credit, but the reaction was mostly a yawn.
The Moody's downgrade comes just as I was going to address the open gap on the weekly chart of the S&P 500 - a very rare event. I went back many years and didn't see any noticeable open gaps on the weekly chart, but here is a more recent two year chart showing a small gap back in 2024. Again, it wasn't large but it did get filled in the first week in August or about three month later.
The current open gap has two potential targets. One is the close from the Friday before, or May 5, which was 5660. The other would be considered filled if that week's high of 5720 is retested. Either one would be a steep pullback from this past Friday's closing price of 5958.
The market lured in investors for weeks after bottoming on April 7th and basically going straight up since the 4-day pullback that ended on April 21. Now that it dragged in enough reluctant bears, it may be ready for a little volatility and perhaps punish the chasers. It could be a quick shake out or a long correction. We have seen both in the past after a credit rating cut.
We should see volatility in stocks, yields and the dollar today, but how much of this news has already been priced into these markets?
The S&P 500 (C-fund) has so much going on in the 5650 area that it seems like a very reasonable spot for a target while the index does some overbought house cleaning. Of course the surprise reaction could be a very minor reaction, but the chart does have several potential downside targets for a pullback, including the bottom of the blue open gaps, one also being in that 5650 area..
The DWCPF (S-fund) has been riding the bullish wave for several weeks now, but if the lowered credit rating pushes yields meaningfully higher, small caps may lose some of their recent luster. Lower interest rates helps smaller companies, not higher, so they may be the first to be sold on any perceived credit issues.
ACWX (I-fund) has been the leading TSP fund this year, but just a note of caution. Even though the credit rating has been dropped in the US and not the I-fund counties, when Finch dropped the U.S. credit rating in 2023, the dollar took off like a rocket. That's not typically good news for the I-fund, and it wasn't back the summer of 2023.
BND (bonds / F-fund) has remained in the current trading range for months now. I took a look back at this chart from back in 2023, and while it did trend lower after the Finch downgrade, it was a little choppier than the straight up rally in the dollar.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Questions, comments, or issues with today's commentary? We can discuss it in the Forum.
Daily Market Commentary Archives
For more info our other premium services, please go here... www.tsptalk.com/premiums.php
To get weekly or daily notifications when we post new commentary, sign up HERE.
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We may use additional methods and strategies to determine fund positions.
