The first and only other time the U.S. faced a downgrade was during the 2011 debt ceiling episode, when Standard & Poor’s similarly demoted the U.S. to AA+ from a AAA rating (a move that was never reversed). That means Moody’s is the only major rating agency that still puts the U.S. in the highest category.

 So should you be worried? Here’s how we think about it: 

What we’re not worried about:

Default. The U.S. government remains in a strong position to keep making its interest payments. The issues that prompted the move are known problems, rather than a reflection of any new news. Fitch also said back in May (when all the debt ceiling drama was still in motion) that they were weighing downgrading the U.S. government’s credit rating. If anything, it was more just the timing of the announcement that was a surprise.

Today’s economy. The labor market is still strong (the economy added another healthy amount of jobs in July, albeit at a slightly cooler pace). Consumers are still spending (for what it's worth, Taylor Swift just added more dates to her North American tour). And that broad economic strength is showing up in a number of bellwether companies’ earnings (take manufacturing giant Caterpillar, for example, which soared to record highs on a blockbuster report earlier in the week).

What we’re worried about now:

A potential government shutdown. While the debt ceiling has been suspended until January 2025, the budget for the new fiscal year has to be approved by September 30 (in less than two months). With the government’s debt burden in such acute focus, spending disputes across and within party lines seem likely. That means that the possibility of a government shutdown can’t be ignored. We’ve dealt with the risk and reality of shutdowns many times before, but such episodes also tend to lead to some – albeit short-lived – market and economic angst.

What we’re worried about later:

The long-term problems of a lot of debt. Michael Cembalest, our Chairman of Market & Investment Strategy, has called out how, over time, growing debt can crowd out other types of productive spending.¹

The larger the pile of debt, the more the government has to pay in interest expense. That makes decisions harder over how to allocate discretionary spending (like healthcare, transportation infrastructure, science, education, and the like). At some point, government spending on entitlements, other mandatory outlays, and debt interest will outstrip its revenues, and this will probably lead to a painful wake up call for policymakers – but it may just take another decade or so to get there:

The knock-on effects, like on the dollar. Worries about deficits and debt tend to prompt questions over whether the dollar can hang onto its crown as the reserve currency of the world. Yet, today, the dollar’s importance is unparalleled in currency trading markets, international trade, international banking and foreign exchange reserves across economies. As an example, the U.S. dollar makes up one side of almost 90% of FX transactions, and it’s used for around half of all trade invoicing. So while history suggests its reign may not be as strong as it is today forever, its position on the throne still looks secure, at least for the next few decades.

In sum:

Fitch’s downgrade calls out the long-term challenges around the large and growing stock of U.S. debt, and at some point those must be reckoned with – but it doesn’t bring new risks or information.

Investment considerations: Maintain a long-run mindset

We understand that you might be nervous. While this week’s news flow doesn’t change our constructive outlook for the next year, it can help to remember your long-term investment plan. Uncertainty and volatility can make navigating the market difficult. But over time, diversified portfolios have been able to smooth the ride, especially through the bad stuff.

Your J.P. Morgan team is here to help.

All market data from FactSet and Bloomberg Finance L.P., 8/4/23.

DISCLOSURES

Small capitalization companies typically carry more risk than well-established "blue-chip" companies since smaller companies can carry a higher degree of market volatility than most large cap and/or blue-chip companies.

International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in international markets can be more volatile.

Diversification does not ensure a profit or protect against loss.

The Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The MSCI World Index is a broad global developed markets equity benchmark designed to support: Asset allocation: Consistent, broad representation of the performance of developed equity markets worldwide, without home bias.

The Bloomberg Aggregate Bond Index or "the Agg" is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

The NYSE FANG+ Index is an equal-dollar weighted index designed to represent a segment of the technology and consumer discretionary sectors consisting of highly-traded growth stocks of technology and tech-enabled companies such as Facebook, Apple, Amazon, Netflix, and Alphabet's Google.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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• Additional risk considerations exist for all strategies.

• The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.

• Structured products are complex debt obligations of a corporate issuer the return of which is linked to the performance of an underlying asset. They are significantly riskier than conventional debt instruments and may not be suitable for all investors.

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• Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.

IMPORTANT INFORMATION

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

Bonds are subject to interest rate risk, credit and default risk of the issuer. Bond prices generally fall when interest rates rise.​ Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss. ​