Investment Newsletter – July 2023
Moody’s remains the last of the three major credit rating agencies to maintain a top rating for the United States, after Fitch cut the sovereign rating early August and Standard & Poor’s lowered it in 2011. Particularly, Fitch Ratings downgrades the US credit rating to ‘AA+’ from ‘AAA’ due to expected fiscal deterioration and high government debt burden. Fitch pointed out the expected fiscal deterioration over the next three years along with a high and growing general government debt burden.
Fitch observed that the US government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade. Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an ageing population.
According to Fitch projections, tighter credit conditions, weakening business investment, and a slowdown in consumption will push the US economy into a mild recession in 4Q23 and 1Q24.
Fitch pointed out that over the next decade, higher interest rates and the rising debt stock will increase the interest service burden. Fitch expects one further hike to 5.5% to 5.75% by September. The rating agency said the resilience of the economy and the labour market are complicating the Fed’s goal of bringing inflation towards its 2% target.
Currently, it is vital to pay attention on the breadth in the US equity markers for signs of market over-extension or capitulation. Very few breadth indicators are flashing danger at the moment, but they are moving in that direction. The percentage of S&P stocks above their 200-day moving average is over 70%, lower than previous market peak of 95%, but it has risen quickly.
The US national average 30-year fixed mortgage rate ended in July where it started before edging near 7% the first week of August. The median existing-home sales broke through $400,000 for the first time in 2023, hitting $410,200, the second-highest price ever recorded and is now poised to surpass the June 2022 all-time high of $413,800. Despite high mortgage rates, the market remains as competitive as ever thanks to tight inventory supply.
On the other hand, one major hurdle for CRE space is that “more than 50% of the USD 2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by 350 to 450 basis points,” Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management, wrote in a note to clients. Shalett expects a “peak-to-trough CRE price decline of as much as 40%, worse than in the Great Financial Crisis.” However, many analysts expect challenges in the CRE space but noted that they are manageable and do not represent a systemic risk to the US economy.
