Stock Prices Are Jumping Again

After the stock market closed on Friday, Moody’s reduced the US government's credit rating from “stable” to “negative” citing large fiscal deficits. The ratings agency said in a statement that “continued political polarization” in Congress raises the risk that lawmakers will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.” Will bond and stock prices tumble on Monday again as they did after Fitch Ratings downgraded US debt on August 1? We doubt it. We all know that fiscal policy is out of control.

The rallies in bond and stock prices since the start of November have been driven by perceptions that the Fed is done tightening, that inflation is continuing to moderate, that bond yields are high enough to attract sufficient demand, and that the soft-landing scenario is still the most likely economic outlo0k, for now. Furthermore, the global economy is weak, but not weak enough to cause a further drop in oil prices.