The S&P 500 and Nasdaq Composite both finished down on Wednesday, as investors took profits on five months of gains a day after rating agency Fitch downgraded the US government’s credit rating.
Fitch downgraded the US to AA+ from AAA late Tuesday, citing budgetary deterioration over the next three years as well as rising government debt. Fitch was the second major rating agency to downgrade the country’s rating. Standard & Poor’s downgraded the country to a triple-A rating in 2011.
The reaction to the news sent major indexes lower, with the S&P 500 (.SPX) seeing its largest daily percentage drop since April 25. It was also the first session since May 23 that the benchmark fell more than 1%.
Nonetheless, some prominent brokerages said the downgrading was unlikely to have a long-term impact on US financial markets, pointing out that the economy is currently better than it was when S&P dropped its rating in 2011.
The S&P 500 and the tech-heavy Nasdaq Composite (.IXIC) gained for the fifth month in a row in July, on to better-than-expected results and hopes for a soft landing for the US economy.
However, as markets approach a seasonal slow period in August, the Fitch rating provided an opportunity for investors to take a breather.
“Sometimes it’s healthy to have this digestion in the market, as it brings down valuations a bit and it allows for dip-buying,” said Quincy Krosby, chief global strategist for LPL Financial in Charlotte, North Carolina.