We have received quite a few questions from clients regarding the budget deficit and our increasing national debt. How much of a problem is our nation’s fiscal trajectory? What about Moody’s recent downgrade of the U.S. credit rating? And what is the impact on investment portfolios? Let’s tackle these questions one at a time.
The House recently passed the One Big Beautiful Bill Act, which is now being debated in the Senate. While the bill includes approximately $1.6 trillion in spending reductions through changes to programs like Medicaid and nutrition assistance, these are outweighed by tax cuts and spending increases in other areas. As a result, the proposed budget could add an estimated $3 trillion or more to the debt over the next ten years.
The national debt already exceeds $36 trillion, or about $106,000 per American.[1] The primary drivers of this debt include mandatory spending on entitlement programs, defense expenditures, and rising interest payments on existing debt. Tax revenues have not kept pace with spending, exacerbating the fiscal imbalance. Over the long term, high debt levels can lead to increased interest rates, reduced private investment, and slower economic growth, and persistent deficits can limit the government’s ability to respond to crises. Additionally, as interest payments consume a larger share of the federal budget, less funding is available for other priorities.
Ameliorating the deficit would require both an increase in taxation and a decrease in spending – two items that politicians are largely unwilling to address due to their unpopularity with voters. As a result, future taxpayers are likely to bear the burden of today’s borrowing if nothing is done in the interim.
Some economists believe that as long as the U.S. can borrow in its own currency and maintain investor confidence, the debt is manageable. The U.S. dollar’s status as the world’s reserve currency and the strength of U.S. financial markets are positives in this regard. Of course, recent fluctuations in the dollar have sparked worries about its reserve status, but those are largely unfounded as there is no other currency that can take its place at this time.
Moody’s recent downgrade of the U.S. credit rating marks an official end to the country’s top-tier debt status. Following Fitch’s downgrade in 2023 and Standard & Poor’s move in 2011, Moody’s decision to lower the rating from Aaa to Aa1 underscores growing concerns about the nation’s fiscal trajectory.[2]
Budget negotiations and debt ceiling standoffs have created significant market volatility over the past fifteen years. There have been many examples, including the 2011 downgrade of the U.S. debt by Standard & Poor’s, the fiscal cliff in 2013, and the government shutdown of 2018 and 2019. In all cases, agreements were eventually reached, allowing markets to stabilize and advance once more.
Even after the 2011 downgrade, which was unprecedented at the time and resulted in a market correction, the S&P 500 experienced a full recovery within months. Despite these downgrades, U.S. Treasury securities are still considered a safe-haven asset during times of market volatility and continue to serve as an important foundation for financial markets.
As taxpayers, voters, and citizens, it’s natural to be concerned that the country is not on a sustainable fiscal path. As significant as these issues are, it’s also important to avoid overreacting with your investment portfolio. While past fiscal challenges and downgrades have led to uncertainty, markets have historically recovered and stabilized over time.
Although the deficit and debt levels are important considerations for the long-term health of the economy, their immediate impact should be kept in perspective. Markets have historically performed well across varying levels of government debt and deficit spending. A disciplined investment approach focused on long-term goals, diversification, and investment fundamentals – rather than on Washington headlines or the hope that Congress will solve the deficit problem – is still the best way to achieve long-term goals.
Modera Wealth Management, LLC (“Modera”) is an SEC registered investment adviser. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. For information pertaining to Modera’s registration status, its fees and services please contact Modera or refer to the Investment Adviser Public Disclosure Web site (www.adviserinfo.sec.gov) for a copy of our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money.
This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.
Investing in the markets involves gains and losses and may not be suitable for all investors. Information herein is subject to change without notice and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
"*" indicates required fields
If you are not a current client but would like to receive pertinent information about how we help people like you, please sign up now. We will send you helpful content and webinar invitations. Thanks for your interest!
