Do Downgrades Really Matter Anymore?

Includes: DIA, SPY, VGK, XLF
by: Wall Street Sector Selector

One certainly would not know that Europe was in crisis or that Moody’s has threatened to downgrade nearly 100 global banks today, as major indexes and ETFs have placed the bulls in charge to likely finish in the green. The SPDR S&P 500 ETF (SPY) rose over 1% today while the SPDR Dow Jones Industrial Average ETF (DIA) rose nearly 1% today. Even the financial sector has snuffed off the threats, as the Financial Select Sector SPDR ETF (XLF) rose over 1% today. Despite Moody’s “threat” to downgrade banks’ credit worthiness, markets do not seem to care.

Throughout the past year, we have seen a record number of downgrades issued to just about every notable sovereign country and major bank. Still, the world is running and not a single major bank or country has defaulted (yet). Granted, banks and countries have avoided defaults because of massive central bank or government interventions such as what we saw with Greece round one or with the great bank bailout of 2009. However, it is clear that credit downgrades have certainly lost their ability to sway investors, bondholders, and politicians from really changing their ways and fixing the issues at hand.

The great downgrade of the United States AAA credit rating by Standard & Poor's last August is likely the most notable downgrade in memory, as the world’s reserve currency and reserve central bank received the axe in an effort to prod policymakers to compromise and reel in enormous deficits. Granted, the AAA to AA+ move triggered a massive temporary sell-off in markets, however the fact remains that the US dollar is still the world’s reserve currency, and bond holders continue to buy US Treasury bonds at record low rates. Did the S&P’s downgrade change the ability of the United States to pay its bills? Absolutely not.

Furthermore, the slew of European banks and European country downgrades by S&P, Moody’s, and Fitch have done nothing to prod policymakers into solving the European debt crisis; if anything the only factors which have prodded policy makers to move is the threat of default itself, not the credit agencies warning of default. And here we are today again with a still unresolved Greek crisis, and even more unresolved debt situations including the likes of Spain, Italy, Portugal, and France, just to name a few. All of the countries mentioned (plus more) have lost their “coveted” AAA status.

ETFs not affected by Moody’s credit downgrade threats today:

  1. SPDR S&P 500 ETF (NYSE:SPY): +1.50 (1.11%)
  2. SPDR Dow Jones Industrial Average ETF (NYSE:DIA): +1.21 (0.95%)
  3. Financial Select Sector SPDR ETF (NYSE:XLF): +0.21 (1.45%)
  4. Vanguard MSCI Europe ETF (NYSE:VGK): +0.79 (1.76%)

Bottom Line: It appears that credit downgrades by the likes of S&P, Moody’s, and Fitch simply do not hold as much clout as they used too, as major banks and central banks continue to find ways to fund themselves despite their “negative outlook” or “reduced” creditworthiness. Perhaps if major credit ratings agencies did not miss The Financial Crisis of 2008, we would take their recent downgrades more seriously, however, as evidenced by the bulls in charge despite today’s threatened downgrades, one might say that credit agencies have started to cry wolf too many times.

Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.