At the same time, the United States is in the midst of a deepening debt and deficit crisis. This unprecedented predicament has left investors and financial analysts at a loss. In light of recent progress, we know that the clock is ticking. It stands to get even worse unless we act with bold policies and urgency. These fiscal challenges are already making serious ripples in the financial markets. Combined, they have set off the largest stock, bond, and U.S. dollar sell-off in recorded history.
It took the seriousness of the entire U.S. debt situation for Moody’s to follow through on that threat, as they issued their extremely visible credit rating downgrade. This downgrading has raised concerns about the country’s fiscal condition that have contributed to a frightening drop in all the big market indices. This news crashed the stock market, with the alternative S&P 500 down 1.61% and the traditional Dow Jones Industrial Average down 1.91%. The loss of 1.41% on the Nasdaq Composite also seemed to underscore the investor panic engulfing the quickly worsening economic environment.
Against such a backdrop of increasing competition, investors are understandably demanding higher returns to hold U.S. debt. The yields on U.S. Treasury bonds have recently shot up dramatically. Last week alone, the 30-year bond yield went over that 5% mark – not once, but twice! At the same time, the 10-year Treasury bond yield hit 4.61% – its highest level since mid-February. Rising yields reflect an increase in pessimism towards U.S. assets. With growing fiscal uncertainty, investors are showing a keen eye to pursue safer havens.
President Donald Trump’s tax bill is projected to tack on $3 trillion to $5 trillion to the national debt. This increase will only exacerbate the already severe fiscal straits we find ourselves in. In the wake of Trump’s proposed spending bill, analysts are sounding the alarm. If it does, it would further increase the U.S. deficit, maintain elevated Treasury yields, and further unsettle the market.
The fear that the economy is slowing down has led to a strong sell-off across just about every asset class. U.S. Treasurys and equities are already starting to feel the impact, while the value of the dollar continues to plummet. Investors are justifiably spooked and the market is having an orderly come-all-the-way-back home to American financial contraptions party.
Michael Hartnett, an investment strategist at Bank of America, offered insights into this shifting economic landscape:
“Weaker U.S. dollar, U.S. bond yield top, China economic recovery … nothing will work better than emerging market stocks.” – Bank of America’s investment strategist Michael Hartnett.
Compared to chaotic U.S. markets, UK’s FTSE 100 index displayed some measured strength and closed up +0.06%. This rise in popularity coincided with recent data showing improvements in the war-torn country’s annual inflation rate. It’s gratifying after watching the fears that gripped U.S. financial markets.
Analysts are watching the case extremely closely. Most of them are deeply worried about the long-term consequences of the chosen fiscal path. The interplay between rising debt levels, potential policy changes, and investor confidence will shape the economic landscape in the coming months.