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Is U.S. Credit in Crisis?

August 8 to 11, 2023


Is U.S. Credit in Crisis?

August 8 to 11, 2023


Market Recap

  • Equity markets slumped this week alongside a sharp selloff in the bond market through Thursday, and some mixed economic data.
  • The S&P 500 was down 2.3%, with weakness in rate-sensitives and technology, while all other sectors but energy were in the red.
  • Meantime, the TSX was down 1.4%, with all but energy also posting declines.

U.S. Credit Rating

Last week, Fitch lowered the United States’ credit rating from AAA to AA+, a move that was reminiscent of a similar downgrade by Standard & Poor’s in 2011 but nonetheless took many observers by surprise. In our view, and despite protests from U.S. treasury secretary Janet Yellen and others, the downgrade is justified—in fact, given the political uncertainty and debt ceiling brinksmanship we’ve seen in recent years, the U.S. credit rating probably should have been downgraded even earlier. The market responded appropriately, selling off somewhat in the wake of the news. In the longer term, however, we share Warren Buffett’s view on the matter: this is unlikely to be a game-changer for the U.S. economy. Yes, the cost of capital goes up when the credit rating is downgraded. But that’s not likely to change the way the U.S. does business, or the way people do business with the U.S. It is still widely considered to be a safe haven economy, and contrary to hopes of de-dollarization from some quarters, the USD actually strengthened in the wake of the news. In our view, the downgrade is more of a statement than anything meaningful from an economic perspective.

Bottom Line: Fitch’s downgrading of the U.S. credit rating is justified, but it is unlikely to have a meaningful impact on the U.S. economy.


It’s been an interesting couple of weeks for Japan. On July 28, the Bank of Japan (BoJ) opted to maintain its ultra-low interest rates, but also announced that it would be loosening its yield curve control policy. Many observers took this to be a first step toward a tighter monetary policy, which would bring the BoJ more in line with other central banks around the world. Japan is a fascinating case study because it doesn’t have the same problems that we’ve seen in Canada, the United States, or other international markets. The BoJ has to do what makes sense for its economy, not what would make sense elsewhere. That has led to a monetary policy that is distinctly different from the world’s other major developed markets. One key factor is that the BoJ is still trying to stimulate the Japanese economy, which started in the 2010s under “Abenomics”—the economic program of former Prime Minister Shinzo Abe, which emphasized the “three arrows” of monetary easing, fiscal stimulus, and government reforms. A declining population and a focus on companies’ underlying fundamentals are also major considerations. Looking ahead, we expect the BoJ to continue to push growth while trying to ensure that the inflation concerns that have affected other economies won’t impact Japan.

Bottom Line: The BoJ appears to be taking the right steps, but it will be a year or more before we know how their policies will shape the future of the Japanese economy.


For much of the year, Energy prices have generally been in decline. But in recent weeks, oil prices have rebounded, prompting questions about whether a bottom of the market has been reached or if there’s more room for prices to fall. Oil prices tend to experience extreme fluctuations—last year, when Russia first invaded Ukraine, they spiked to around $120 per barrel, but then came all the way back down to the lows of late 2022 an early this year, which was a bit of an overcorrection in our view. Now, we’re at something of a happy medium; $80-$90 per barrel is a fair number given China’s not-overwhelmingly-successful reopening, OPEC’s unwillingness to increase supply, and indications than any recession will most likely be a mild one. We believe there is still value in many Energy companies. But given the recent run-up in oil prices, we’d likely wait for another pullback before becoming buyers.

Bottom Line: For now, we’re largely neutral on Energy, and think that oil is fairly valued.


We remain not especially worried about the state of the economy. A mild recession sometime in the next 12 months remains the most likely scenario, but that’s a rolling 12-month estimate—if the data continues to be decent over the next three months, for instance, that could push the recession out even further. The bulls and the bears continue to fight it out, but recently, we’ve seen some of the bears move into the bull category, or at least shift to a neutral stance. When the outlook is bearish, it’s relatively easy for markets to be surprised on the upside. But when more people move to the bulls’ camp, it’s harder for positive surprises to happen. That’s a dynamic we’ll be monitoring in the weeks and months ahead. Overall, we expect an environment that will favour playing it close to the vest—if portfolio protection is cheap, it’s worth acquiring, but with a recession not imminent, there’s no reason to be excessively defensive.


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