S&P Downgrades U.S. Credit — August 5, 2011
The unprecedented sovereign downgrade
Standard & Poor's stripped the U.S. of its AAA credit rating after the debt-ceiling standoff. The S&P 500 fell 17% in 11 days. Paradoxically, Treasury prices ROSE (yields fell) as investors fled TO the downgraded asset.
| Date | 1M return | 1Y return | 5Y return |
|---|---|---|---|
| 2011-08-05 | -2.9% | +16.3% | +81.9% |
What history says
Editorial commentary written by ALAN analysts. Figures cited below are analyst-authored context — they are not derived from the chart above and may reflect different windows or sources.
A credit downgrade of the world's reserve currency issuer caused a panic that fully reversed within 5 months. By February 2012, the S&P 500 had exceeded its pre-downgrade high.
Investors fleeing risk bought the very asset that was downgraded. This demonstrated that US Treasuries' 'risk-free' status comes from liquidity and reserve-currency status, not credit ratings.
Advisors who held clients through this episode delivered materially better outcomes than those who capitulated. The 12-month return from the August low was +25%.
Headline downgrades of the very assets that anchor a portfolio are a test of process, not a signal: before reacting, check what actually repriced — in 2011 Treasuries rallied on their own downgrade — and let a scheduled review, not the news cycle, decide any changes.