On August 1st as many cheered the rise in GDP, partly because consumer spending is 70% of the GDP, another agency did not cheer at all.
With Government Debt to the GDP ratio super high, coupled with high interest rates, Fitch was not having it.
They see this as a huge stress on the economy.
In 2011, the last time the US had a downgrade, the Federal Reserve promised to keep interest rates low. That turned out to create a huge buy opportunity.
Now though, the Federal Reserve makes no such promise. They have inflation, a strong labor market, and now a debt downgrade on their hands.
This leaves very little wiggle room for the FED to maneuver.
In 2011, the Fed was not worried about inflation. Now they are.
What do Granny and Gramps of our Economic Modern Family have to say about that?
This is a great time to look at the monthly charts.
Remember, our thesis was that over the 23-month moving average (blue line) the index or sector signals expansion on a 2-year business cycle.
All the indices accomplished that including IWM or the Russell 2000. Yes, Gramps was last of the four, however, he’s gramps.
Now, with the news of the downgrade, IWM is taking a breather. Yet, not too bad at this point.
With a lot of government spending supporting manufacturing and industry in the US, Gramps WANTS to expand. Of course, that is how the government created so much debt in the first place…
But can it last?
August has just begun so we do not really know at this point.
Granny Retail on the other hand, has yet to clear its 23-month MA and convince us that the retail consumer is hanging around for a better second half of the year.
That makes for some interesting diversions.
191 is the level for IWM to hold. On a shorter timeframe, 193 is the July 6-month calendar range high. Right now, both levels are intact.
67.40 in XRT is the July 6-month calendar range high-the price sits below that. 69.50 is the 23-month MA. The price sits below that.
Should XRT break 66.00, that is a sign of weakness.
Bottom line:
Granny has the purchasing power and the greater influence on the GDP.
We like where IWM is holding for sure.
Without his bride though, today’s downgrade is a harbinger.
Twitter: @marketminute
The author may have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not represent the views or opinions of any other person or entity.
