The bottom has dropped out for the major US indices with the Nasdaq down over 2% and S&P 500 down 1.25% as of this writing. The catalyst has been the downgrade of the United States’ credit rating by Fitch from AAA to AA+ . That is the first downgrade of U.S. sovereign debt in almost twelve years and just the second ever. In the charts below, we show the performance of the S&P 500, government debt, commodities, and the US dollar in the year before and the year after the 2011 downgrade.

The S&P 500 has been rallying in the months leading up to this downgrade, however, back in 2011 the S&P 500 had already begun rolling over by the time S&P downgraded US debt. In the wake of that downgrade, the S&P 500 went on to fully erase all of the prior year’s gains. Fortunately, all of those losses were quickly recouped within three months of the downgrade.

As for Treasuries and other US agency debt, performance over the past few months has been the complete opposite of 2011.Of course, the interest rate environment is also completely different now with Fed Funds 500 bps higher than it was at the time of the last downgrade. That being said, in 2011, Treasury yields were on the decline in the months headed into the downgrade, but contrary to what might have been expected, the downgrade itself did not change that trend. This time around has seen yields on US government debt moving in the opposite direction.

Bloomberg’s broad commodity index has been in a similar boat with the past few months seeing a decline compared to the steady uptrend back in 2011 that was uninterrupted by the downgrade.

Finally, we would note the downgrade only acted as a longer-term turning point for the dollar. As shown in the bottom right-hand chart, both this year and in 2011, the trade-weighted dollar was in a downtrend in the year before the downgrade. But right as S&P changed its rating, the dollar turned higher and continued to rise throughout the following year. In fact, one year out it had erased the entirety of the previous year’s decline.

(Click on image to enlarge)

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