The Nation's Credit Rating was Downgraded & Interest Rates Were Raised: What That Means For You

⚠️ Concerned that the U.S. credit rating was downgraded and interest rates were raised? 💥

Tune in to see why this isn't likely to affect the financial markets long-term on the latest #YouandYourMoney podcast, with Michael Baum, CFP®, RICP®. 

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Transcript

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Welcome to You and Your Money. Empowering you to reach your goals with tips to help you Plan Well, Invest Well and Live Well. Today's episode features Michael Baum, vice president and associate financial advisor at Weiss, Hale and Zahansky Strategic Wealth Advisors. Let's dig in to today's topic. Take it away Mike. Now let's get into our topics. First topic is the recent credit rating downgrade of the United States. So give us a brief overview of that situation. Certainly, Gary. So on August 1st, one of the three main credit rating agencies, Fitch, downgraded the U.S. credit rating from triple-A to Double-A plus. That's the that's the headline. It's a downgrade in the credit rating. Sounds like really, really bad news. However, this is not the first time that this has happened. So the one of the other three main credit ratings, S&P actually downgraded the U.S. credit rating in 2011 due to concerns over a political disputes and the debt ceiling standoffs. And they've actually never raised that back to triple-A. So we've had at least one of the three credit rating agencies rating them a plus for over ten years now. Fitch's recent downgrade was primarily due to these same reasons, political dysfunction and other factors, such as rising deficits and tighter monetary policies. But it's important to note that Double-A Plus is still considered investment grade, meaning the borrower is still considered financially strong, with a strong likelihood of repaying their debts and very, very low risk of default. Due to political dysfunction. I like the way you phrase that, and I know I know what you're talking about. All right. So thank you for that. Mike Now, the historical context is crucial to understanding the significance of this move. Can you elaborate on the potential market impact of that downgrade? Yeah, I don't want to make light of it because it's certainly noteworthy and newsworthy, but it seems like there's a minimal market impact this time around. Okay. So unlike 2011, when when S&P downgraded the credit rating, we haven't seen any major market sell off triggered by the downgrade. Investors seem to be taking it mostly in stride, likely because the U.S. had already been rated A-plus by S&P for over a decade without any major repercussions. The timing of the downgrade announcement has raised questions. However, given the strong economic reports we've seen lately. All right, fair enough. And thanks for that clarification. Let's shift to our second topic. Michael. The ongoing federal interest rate hikes, everyone's talking about it. You mentioned that earlier. Could you briefly explain what these hikes entail and their purpose? Certainly so that when the Federal Reserve raises its benchmark interest rate, borrowing becomes more expensive for banks, which of course, they pass along to consumers. So businesses and individuals who need to borrow money are going to be paying more to access those funds. This is done with the goal of slowing down the economy as a means of managing inflation, because if businesses and people can't get access to easy and free money, they'll probably need to be a little bit more careful about how they spend. So the most recent rate hike in July was the 11th hike in the last 17 months, and over those 17 months, the benchmark interest rate has risen from near zero to well over 5%. Okay. Thank you again for that context. So it's obvious how it affects consumers, businesses, commercial lending, that kind of thing. But how do interest rates, interest rate hikes affect the stock market and investors? Good question, Gary. So the interest rate hikes of the past year and a half have been really extreme, like I was saying. And it's not just that the rates have increased, they've increased very sharply. And the speed and and sharpness of those increases has brought it to a 22 year high, meaning it hasn't been this expensive to borrow money since 2001. Investors don't like uncertainty and neither do the markets and rapidly shifting interest rate environments leads to uncertainty, especially in 2022, where we saw temporary stock dips and increased volatility. So for businesses, higher borrowing costs can impact profitability and their stock prices and rising interest rates tend to make people want to shift to safer assets like bonds where they can get, you know, a safer, more secure return and takes some of the investment focus away from stocks. All right. Again, great explanation. The word strategic is in your title. Let's talk strategies. What strategies do you recommend, Michael, for investors to navigate these potential impacts? All right. So first and foremost, stay informed. So keep an eye on the Federal Reserve statements and the economic indicators that they're watching to to lead or drive anticipated rate changes. While we believe we're nearing the end of the rate hike cycle. Rate hike cycle, the Fed has been clear that they will take a data driven approach so we can really follow the data to try to get ahead of what might come next. And, you know, how are we guiding our clients through this time? I would say, you know, stay diversified, spread your portfolio across different asset classes to mitigate risk. And, you know, if you have a lot of cash that you're sitting on right now, it's definitely a good opportunity to get a really strong yield with taking very little risk. And that's something that we couldn't say over the last ten or 15 years. Absolutely. All right. Again, great advice, Mike. Two big important topics that's affecting affect affecting us all in one way or another. So what should individuals do if they're concerned about these financial developments? What do we do? Well, of course, I'm biased, but I would say it's essential to consult a financial advisor. Call Michael Baum, okay. If you're concerned about the credit downgrade or interest rate hikes or just anything that you're reading in the news, I think it's really important that you seek guidance. You know, my colleagues and I at Weiss, Hale and Zahansky Strategic Wealth Advisors offer tailored advice and strategies through our Plan Well, Invest Well, Live Well process. And that's all designed to help you achieve your financial goals and dreams. Yeah, that's great, Mike. And to our listeners, remember, understanding these financial intricacies is key to making informed decisions. So whether it's creating credit rating downgrades or interest rate hikes, staying informed and seeking professional and advice can help you secure your financial future. And if you have questions or need assistance, don't hesitate to call. It's Weiss,Hale and Zahansky. Strategic Wealth Advisors. 860-928-2341. You can also schedule a consultation on their website and go ahead and do that. Pretty good advice there. Hey Mike, again, thank you for sharing your advice and your thoughts here today. My pleasure, Gary. Happy to shed light on these important topics. Indeed. That's it for today. Thanks for listening. You and Your Money find even more episodes, videos and other resources at our web site, whzwealth.com. Be sure to come back next week for more tips to help you live fearlessy and pursue your financial and life goals. Until then, live well. Weiss, Hale and Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial Network member FINRA/SIPC, a registered Investment advisor. Fixed insurance products and services offered through CES Insurance Agency. They practice at 697 Pomfret Street. Pomfret Center, Connecticut, 06259 and can be reached at 860-928-2341. Weiss, Hale and Zahansky Strategic Wealth advisors do not provide legal or tax advice. The tenured financial services team strive to support clients in achieving their financial life goals. For more information regarding wealth management and customize financial planning with Weiss, Hale and Zahansky Strategic Wealth Advisors, please visit. www.whzwealth.com.