Standard & Poor's downgrade of U.S. Treasury debt from AAA to AA+ late last week has sent shock waves throughout the financial sector, but what kind of impact will it really have? The short answer is "No one really knows," since we haven't faced this kind of ratings downgrade before. Warren Buffett got a lot of attention on Friday for saying that the downgrade was a mistake, and that he thinks Treasury bonds deserve a "quadruple-A" rating.
Be that as it may, we still have to live with the downgrade we got. The effects will be muted because the two other major ratings agencies - Moody's and Fitch - still rate us AAA, meaning any firm that is required to invest in the safest possible instruments can rely on those ratings and keep buying Treasury bonds. In fact, Treasury prices moved up on Monday morning after the downgrade, signaling that investors still have faith on the ability of the U.S. to pay its debts.
But of course, the market had a horrible day on Monday, with the S&P 500 posting its fourth-biggest point drop ever. It’s likely, though, that that response was more about overall economic conditions than the downgrade itself, which would affect bond prices more than it would stocks. Goldman Sachs and Barclays, looking to corporate fundamentals, still both forecast the S&P 500 to rise by more than 20 percent between now and the end of the year.
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