This Is Why the United State's Credit Rating Matters for Investments

Normally, a borrower with trillions of dollars in debt would set off alarm bells in the heads of lenders, but when that borrower is the United States of America, it's business as usual. At least, it was until early this month -- when a major credit rating agency downgraded the country's credit rating for just the second time in history. You may have noticed the fallout in your brokerage account, as stock values dipped to start off August. What does this mean and why should it matter to you?

What is the national credit rating?

Whether they are individuals, businesses, municipalities, or federal governments, all borrowers carry some risk to lenders. Major credit rating agencies exist to quantify the risk involved with giving credit to many organizations, including sovereign governments.

There are three major credit rating agencies: S&P Global, Moody's, and Fitch Ratings. Each scales risk slightly differently, but the most creditworthy borrowers are granted a "AAA" rating while less creditworthy borrowers might get as low as a "C" or "D" rating. Most high-income countries carry an "A," "AA," or "AAA" rating.

The creditworthiness of a country can be thought of as one measure of financial health. Similar to your own credit score, rating agencies consider things like amount of debt, repayment history, and cash flows when calculating a nation's rating. Rating agencies may also consider other factors, such as political stability, in their assessment.

Fitch downgrade

Earlier this month, one of the major credit rating agencies, Fitch Ratings, lowered the United States' creditworthiness rating. The move isn't unheard of, but downgrades to the U.S.'s credit are very uncommon.

Fitch announced in early August that it was downgrading the credit rating of the United States from the highest credit quality "AAA" to a lower "AA+" rating. This isn't the first time that the federal government has been downgraded. The first downgrade in U.S. history occurred in 2011 following that year's debt ceiling crisis, and ending a previously clean record.

Fitch cited a variety of economic factors in its announcement of the downgrade, including rising concerns over GDP growth, Fed quantitative tightening, and ballooning national debt. The agency also highlighted political stability, specifically citing past last-minute resolutions to debt ceiling and government shutdown negotiations. Most concerning is not the magnitude of the downgrade, but the direction it indicates the country is heading.

Broad reactions

Following the announcement earlier this month, stocks have been a mixed bag. Earnings announcements by many large companies have added to volatility in the market, as have new predictions regarding the likelihood of a recession. As of this writing, the S&P 500 has fallen nearly 3.5% since the announcement.

The substance and timing of the downgrade have been rebuffed by many in the private and public sectors. The announcement drew ire from President Joe Biden and Treasury Secretary Janet Yellen, who dismissed the notion as "arbitrary." Some experts view this as a temporary speed bump for America's financial system in the short term, but don't expect the downgrade to persist.

Major credit agencies, such as Fitch Ratings, regularly weigh in on the creditworthiness of government borrowers. Citing political and financial instability, Fitch downgraded the credit rating of the United States, spurring market turbulence and drawing criticism from government leaders. The downgrade is not permanent, and investors should avoid panic selling and keep a long-term focus, despite news like this.