Seven years on since S&P hit the US with a shock downgrade

It’s been seven eventful years since Standard & Poor's threw the US a major curveball when it stripped the world’s largest economy of its coveted AAA credit rating.

Suffering from the fallout of the global financial crisis, on 5 August 2011 the rating agency hit the US with a shock downgrade, taking its credit rating a notch lower to AA+, primarily as a result of concerns over the country’s budget deficits.  

At the time the US was also struggling with issues such high unemployment and the threat of a double-dip recession.

By taking away the US’s perceived ‘safe haven’ status, S&P was essentially saying it had slightly less confidence in it paying its debts and its decision sparked fears that investors would lose confidence in the market.

But that was then…

Fast forward seven years and the backdrop appears significantly altered in the US; investors seem to have shrugged off the Armageddon-like scenario that gripped markets at the time.

And while the US has yet to regain its AAA label, it still boasts top credit scores at both Moody’s and Fitch Ratings.

Geopolitical uncertainty endures and trade wars have dominated media coverage but the US economy, and its employment rate, is continuing to recover.

During the second quarter this year, its economy grew at an annual rate of 4.1% - its fastest pace of expansion since 2014 - and simultaneously its growth rate for the first three months of 2018, was revised up from 2% to 2.2%.

Investors in US stocks have been well rewarded over recent times too, with the market having hit a number of fresh highs over the past year. Notably since the start of August 2011 to the end of June this year, the blue-chip S&P 500 index has delivered a substantial total return of 204%.*

Of course, this ascension has arguably made it expensive relative to other markets – and there is certainly no guarantee that it will repeat this performance. For now however, UK investors appear to be keeping the faith in the US. The latest sales numbers from trade body, The Investment Association, show that during June, in regional, equity fund terms North American portfolios were by far the top sellers, with net retail sales of £273m.**

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*Source: Bloomberg - total return, sterling terms

**The Investment Association - https://www.theinvestmentassociation.org/media-centre/press-releases/2018/press-release-statistics0618.htm