Moody's Downgrades U.S. Credit Rating, U.S. Stocks Rebound Despite the Downgrade: Dow Jones Gains 137 Points, Philadelphia Semiconductor Index Declines

On May 16, Moody's downgraded the U.S. sovereign credit rating from "Aaa" to "Aa1," causing initial market volatility. However, on May 19, the three major U.S. stock indices closed higher despite the trend. The Dow Jones Industrial Average rose by 137.33 points, the S&P 500 inched up 0.09%, the Nasdaq ticked up 0.02%, while the Philadelphia Semiconductor Index fell by 0.50%. Investor sentiment steadied as retail buying supported the market, showing confidence in U.S. assets. In the bond market, the yield on the U.S. 10-year Treasury rose to 4.55%, and safe-haven assets like gold rose 1.54%.

Moody's Downgrade Triggers Initial Shock

Moody's announced after the market closed on Friday that it would downgrade the United States' long-term sovereign credit rating from "Aaa" to "Aa1" due to the continuous rise in U.S. government debt and increasing interest burdens. This marks the first time since the agency began ratings in 1919 that it has removed the highest credit rating for the U.S. This also means the U.S. has lost its last "AAA" rating among the three major credit rating agencies.

As soon as the news broke, U.S. stocks experienced significant volatility at the opening on Monday. The Dow Jones Industrial Average once fell more than 300 points, while the S&P 500 and Nasdaq indices both dropped more than 1% during the session. Meanwhile, U.S. Treasury yields rose to over 4.55% and 5% for the 10-year and 30-year bonds, respectively, reflecting the market's reassessment of the risk premium on U.S. debt.

Investor Sentiment Stabilizes, Major Indices Close Higher

Despite early pressure, as U.S. bond yields retreated from their highs, market risk aversion gradually eased, and the three major indices stabilized in the afternoon, ultimately closing higher. According to closing data:

The Dow Jones Industrial Average rose 137.33 points, or 0.32%, to close at 42,792.07 points.
The S&P 500 Index increased by 5.22 points, or 0.09%, to close at 5,963.60 points, marking its sixth consecutive day of gains.
The Nasdaq Composite Index rose 4.36 points, or 0.02%, to close at 19,215.46 points.
The PHLX Semiconductor Index fell 24.48 points, or 0.50%, to close at 4,897.71 points.

The rise in the Dow was mainly driven by a rebound in UnitedHealth Group's stock, which rose 8.21% in a single day, making it the top performer in the Dow.

Retail Buying Supports the Market

According to market data, retail investors showed strong buying on Monday, with a net purchase of U.S. stocks totaling $4.1 billion, a record high, accounting for 36% of the day's overall market trading volume. This wave of "buying on dips" is seen as one of the key forces supporting the market's stabilization.

Although the downgrade initially caused panic, some market participants believe that this rating adjustment was already anticipated by the market. Dave Mazza, CEO of Roundhill Investments, pointed out that unlike the market's violent reaction when S&P downgraded the U.S. rating in 2011, this downgrade occurred in a context where the market was already highly vigilant about fiscal deficits and tariff risks, making the impact relatively limited.

Bond Market and Safe-Haven Investment Reactions

In the bond market, the yield on the U.S. 10-year Treasury once rose to 4.55%, and the 30-year yield broke through 5%, reaching a new high since November 2023. The rise in yields reflects a reassessment of the U.S.'s debt repayment ability by the market and also pushed up mortgage rates, with the 30-year fixed mortgage rate rising to 7.04%, the highest since April.

In terms of safe-haven investments, New York gold futures prices rose 1.54%, closing at $3,236.30 per ounce, indicating that some funds are turning to gold to hedge against potential risks.

Divergent Performance in Semiconductors and Tech Stocks

The PHLX Semiconductor Index fell 0.50%, reflecting continued pressure on tech stocks following the downgrade news. TSMC ADR fell 0.37%, ASE ADR declined 0.90%, while UMC ADR went against the trend, rising 0.76%. Among individual stocks, NVIDIA's stock price edged up 0.13%, closing at $135.57, while Tesla fell 2.25%, closing at $342.09.

Wall Street Views: Downgrade as a Warning but Not a Surprise

Several Wall Street analysts expressed concerns about Moody's downgrade but generally believe its substantial impact on the market is limited. Eric Beiley of Steward Partners stated that this is a warning that may prompt some fund managers to take profits after the recent stock market rebound. Ivan Feinseth of Tigress Financial Partners noted that U.S. debt as a global benchmark could have broader implications for other sovereign debts.

Max Gokhman of Franklin Templeton emphasized that if large institutional investors begin to reduce their holdings of U.S. debt, it will further increase the U.S.'s debt financing costs, diminishing the appeal of the dollar and U.S. stocks.

Moody's Downgrades U.S. Credit Rating, U.S. Stocks Rebound Despite the Downgrade: Dow Jones Gains 137 Points, Philadelphia Semiconductor Index Declines

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