Why the Fitch downgrade is just an excuse for stocks to sell off

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Stocks were under pressure Wednesday after Fitch cut the rating on U.S. debt to AA+ from AAA. The Nasdaq Composite (^IXIC) sank 2%, while the S&P 500 (^GSPC) suffered its first one-percent down day since May.

The move by Fitch and the resulting market action call to mind a similar downgrade by S&P Global Ratings in August 2011. Critically though, current market action is by far more muted in comparison — suggesting that the Fitch announcement is more of an “excuse” than a “catalyst” for markets.

JC Parets, founder and president of AllStarCharts.com, joined Yahoo Finance Live to discuss the decision.

“Who is Fitch? I think the market has bigger fish to fry,” said Parets before ticking off the forces in the markets that may have given the bears an edge — if only for the day.

He pointed out the recent strength of the U.S. dollar and surging Treasury yields, which tend to weigh on equities — particularly the high-growth stocks that have performed the best this year. There’s also a tendency for stocks to move sideways in pre-election years during the month of August, which he noted.

By comparison, a dozen years ago, the investing mood was quite bleak.

S&P Global announced the downgrade on an August Friday after a stormy week on Wall Street. Traders were obsessing over the latest news on deteriorating European debt, while the euro currency itself was facing an existential crisis. Only the day before, the Dow had closed down 4.3% — equivalent to roughly 1,500 points today.

When markets finally opened on Monday, August 8, the S&P 500 got rocked for a 6.66% loss while the 10-year got pummeled, down 22 basis points to 2.34%. Gold surged 3% to a then-record high of $1,713 — the biggest jump in over two years.

Compare that to today.

The Dow closed Wednesday down 0.89%, or 318 points. In bonds, the 10-year yield climbed to 4.13% — the highest level since November — but retreated and closed with a gain of less than 3 bps. Gold actually settled down about 0.3%. The dollar index strengthened.

As Mohamed El-Erian told Yahoo Finance on Wednesday afternoon, “I don’t think that this Fitch rating changes anything.”

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