Last Friday, Moody's downgraded the United States' credit rating.
It is the last of the three major credit rating agencies to downgrade it, joining Fitch and S&P Global in stripping its pristine Aaa rating. It now ranks Aa1, which is one notch below.
Fitch lowered its rating in 2023, and S&P Global in 2011.
Moody's first assigned a Aaa rating to the US in 1919, which it had maintained up until now.
Image source: Getty Images
What prompted the downgrade?
Moody's cited the US' debt levels, which have steadily increased over the past decade. The US national debt now exceeds US$36 trillion.
Moody's also expects this figure to grow, stating:
While we recognise the US' significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics.
Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.
Could it be downgraded again?
Moody's said the US' credit rating is unlikely to be further downgraded anytime soon, with the US outlook rated 'stable'.
However, this classification was based on the long-standing independence of the US Federal Reserve. Recently, US President Trump has floated the idea of firing Federal Reserve Chairman Jerome Powell, which was not well received by markets.
Should VTS ETF investors be worried?
While there's certainly a chance this downgrade could unsettle financial markets in the short term, there's no need to sell US stocks just yet.
Investors should remember that Moody's was the last major ratings agency to issue this downgrade, so it wasn't a major surprise.
Those invested in US-focused ETFs, such as the Vanguard US Total Market Shares Index AUD ETF (ASX: VTS), have done extremely well over the long term.
Since S&P Global issued its downgrade in August 2011, VTS ETF investors are up around 660% on their investments.
And since Fitch followed suit in August 2023, investors are up 32%.
It should also be remembered that the US equities have demonstrated an upward trend over the long term.
According to the 2024 Vanguard Index Chart, US shares have increased at a compound annual growth rate of 11.1% over the last 30 years. That comes despite the dot com bubble bust, the global financial crisis, and a global pandemic. The credit ratings downgrades by S&P Global (2011) and Fitch (2023) also occurred over that time frame.
A $10,000 investment into US equities in 1994 was worth $237,318 in 2024. Those who invested that same $10,000 into cash would now have just $34,552.
As Warren Buffett once said, "Never bet against America".
While US$36 trillion in debt is certainly problematic, history tells us that the US has managed to emerge from every major crisis on the other side, allowing equity markets to reach new heights.
