I’m in Rhode island right now, where I own a home and usually spend summer vacations. My family is irked that I never stray from my laptop, even when we’re all gathered near the shore.

August is traditionally the month for summer leisure, but I warn you, don’t get too comfortable in your beach hammock. The 24/7 news cycle, and the computer algorithms that govern Wall Street, are always on the job. Money never sleeps.

The “Dog Days” aren’t as placid as they used to be. Case in point: The stock market rally was interrupted last week by the unwelcome news that Fitch, one of the major credit agencies, had downgraded the U.S. debt rating a notch from AAA to AA+.

Fitch’s move was only the second downgrade in U.S. history, following a similar step by Standard & Poor’s in August 2011.

Both times, the overriding reason was political brinkmanship over the debt ceiling, although last week, Fitch also cited fiscal deterioration and diminished confidence in America’s political leadership due to the January 6 insurrection.

The result was that U.S. and international stocks experienced their first significant sell-off since May, and the benchmark 10-year U.S. Treasury yield jumped to a new high for the year (see chart).

The more pressing question is whether the downgrade is worrisome enough to change the long-term outlook for the markets and torpedo the rally. I don’t think so.

But don’t just take my word for it. Jamie Dimon, CEO of JPMorgan Chase (NYSE: JPM), and Warren Buffett have both said that anxiety over the Fitch downgrade is unwarranted.

Dimon, who heads America’s largest bank, stated that the downgrade “doesn’t really matter that much.” Billionaire super-investor Buffett said: “There are some things people shouldn’t worry about. This is one.” They both insist that market forces, not credit agency pronouncements, are the overriding factors.

Who are we to argue with these two Masters of the Universe?

You may be surprised to learn that when the U.S. lost its AAA rating from Standard & Poor’s more than a decade ago, the decision was never reversed. The downgrade sparked a 4.8% decline in the S&P 500 the day of the announcement on August 4 and another 6.5% decline on August 8. Stocks remained volatile over the following two months, but soon thereafter recouped their losses.

Wall Street’s reaction to the Fitch downgrade last week was considerably milder, and for good reasons. In 2011, the trauma of the global financial meltdown was still fresh, economic growth was fragile, and the unemployment rate was 9%. Today, the U.S. economy has been growing at an above-trend pace and the unemployment rate hovers at the five-decade low of 3.5%.

What’s more, investors have become accustomed to the inane theater that surrounds every debt impasse in Congress.

To be sure, the growing federal debt is a concern, but it’s not news. Through it all, U.S. Treasuries remain the world’s premier safe asset, not due to the U.S. debt’s credit rating, but because of the Treasury market’s vast liquidity and market depth.

My take is that, with the S&P 500 up nearly 17% year to date, investors seized on the Fitch move as an excuse to pocket some profits. The rally was overdue for a breather and got the catalyst it was looking for.

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Even as the U.S. dollar rose for the week and equity markets only experienced a modest retreat, fixed-income investments racked up outsized declines. Ten-year Treasury yields set a nine-month high and investment-grade bonds relinquished their gains for the year. The renewed emphasis on fiscal deficits and the boost in the size of the Treasury’s quarterly bond sales probably contributed to the climb in yields.

However, the retreat in bonds resulted from several trends. Despite the Federal Reserve’s aggressive monetary tightening, U.S. economic growth continues to surprise on the upside. As the likelihood of an inflation-killing recession has lessened, investors are acknowledging that the Fed might keep rates higher for longer.

What’s more, prices for commodities have been rising. Notably, the price of oil has surpassed $82 per barrel. Up until now, falling commodity and oil prices have exerted a deflationary effect, but that’s about the change, at least in terms of commodity inputs.

The floor for Treasury yields is now higher, but we’re unlikely to see a major spike because inflation overall continues to fall and the Fed is nearing the end of its tightening cycle.

The Fed is getting closer to a pause in tightening, with a rate cut expected in early 2024. History over the past four decades shows that Treasury yields have always declined six months after the last Fed hike.

Despite Fitch’s confidence-sapping move, I see nothing to alter the long-term bullish narrative. On Monday, the main U.S. equity indices closed higher as follows:

• DJIA: +1.16%
• S&P 500: +0.90%
• NASDAQ: +0.61%
• Russell 2000: +0.08%

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John Persinos is the editorial director of Investing Daily.

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