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.
This decision comes as Congress debates a new budget bill that could increase annual deficits, highlighting the gap between tax cuts and fiscal sustainability. Amid this debt, deficit, and political uncertainty, many investors may wonder what this means for their financial plans.
Budget negotiations have historically created periods of uncertainty
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, the government shutdown of 2018 and 2019, and more. However, 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. It may seem paradoxical, but 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.
So, when it comes to the national debt and Washington budget battles, it’s important to keep the issues in perspective. As taxpayers, voters, and citizens, it’s natural to be concerned that the country is not on a sustainable fiscal path. Unfortunately, there are no easy solutions to these challenges, and various commissions and proposals have failed to truly reduce the size of annual budget deficits.
As significant as these issues are, it’s also important to avoid overreacting with our investment portfolios. While past fiscal challenges and downgrades have led to uncertainty, markets have historically recovered and stabilized over time. A disciplined investment approach focused on long-term goals, diversification, and investment fundamentals – rather than on Washington headlines or hope that Congress will solve the deficit problem – is still the best way to achieve long-term goals.
The downgrade by Moody’s comes at a critical moment as investors shift their attention from tariffs to Washington’s budget proposal. While markets performed well following last year’s presidential election partly on expectations of pro-growth policies and an extension of the Tax Cuts and Jobs Act of 2017 (TCJA), the Moody’s announcement serves as a reminder of the other side of the fiscal situation.
Specifically, Moody’s emphasized that “successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” and that they “do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
Tax Cuts and Jobs Act provisions are on track to be extended or made permanent
Perhaps not coincidentally, Congress is in the middle of crafting a new budget bill, and some provisions are still evolving. The latest proposal aims to provide certainty by extending the individual tax cuts from the TCJA, which would otherwise expire at the end of 2025.
This would avoid a potential “tax cliff” – a scenario where tax rates would revert to pre-TCJA levels, potentially creating economic disruption. By addressing these concerns well in advance of the expiration, policymakers hope to provide stability for both consumers and businesses.
The comprehensive tax package contains numerous provisions affecting both businesses and individuals. Key elements, which are subject to change, include:
For Individuals:
- The TCJA individual tax rates would become permanent, with a top rate of 37%
- The child tax credit would increase from $2,000 to $2,500 through 2028
- The state and local tax (SALT) deduction cap is a point of controversy, with some proposing a $30,000 cap (an increase from the current $10,000)
- Tips and overtime pay would be exempt from income tax through 2028
- Interest on auto loans would become tax-deductible through 2028
- A new type of savings account known as the “money account for growth and advancement” (referred to as “MAGA accounts”) would be created for children under 8 for education, small business investments, and first-home purchases
For Businesses:
- The pass-through business deduction would increase from 20% to 23% and become permanent
- 100% bonus depreciation for qualified business assets would be reinstated for property acquired between January 2025 and 2029
- Research and development tax deductions would be reinstated
Notably absent from the proposal are provisions for a “millionaire tax” and changes to carried interest tax treatment, which some had anticipated. The debt ceiling, which represents how much the country can borrow, could also be raised by $4 trillion.
Deficits may continue to add to the debt
While the latest proposal includes approximately $1.6 trillion in spending reductions through changes to programs like Medicaid and nutrition assistance, they are outweighed by tax cuts and spending increases in other areas.
Annual budget deficits matter because they add to the national debt, which already exceeds $36 trillion, or about $106,000 per American. It’s reported that the proposed budget could add an estimated $3 trillion or more to the debt over the next ten years. The most recent estimate by the Joint Committee on Taxation, a nonpartisan committee of Congress, showed that the debt could increase by $3.7 trillion over this period.
It’s no secret that the national debt has grown considerably in recent decades, with interest payments continuing to rise. Given that most federal spending is allocated toward mandatory programs like Social Security and Medicare, it’s politically difficult to agree on significant spending cuts. This is why some worry that tax rates will eventually need to rise to make up the difference, even though the TCJA may be extended or made permanent in the near term.
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.
Ironically, some of the strongest market returns over the past two decades have occurred after the worst deficits, since these usually coincided with economic crises when markets were at their lows. In other words, making investment decisions based on government spending and deficits would have been counterproductive.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
Debt, Deficits, and the Moody’s Downgrade
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.
This decision comes as Congress debates a new budget bill that could increase annual deficits, highlighting the gap between tax cuts and fiscal sustainability. Amid this debt, deficit, and political uncertainty, many investors may wonder what this means for their financial plans.
Budget negotiations have historically created periods of uncertainty
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, the government shutdown of 2018 and 2019, and more. However, 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. It may seem paradoxical, but 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.
So, when it comes to the national debt and Washington budget battles, it’s important to keep the issues in perspective. As taxpayers, voters, and citizens, it’s natural to be concerned that the country is not on a sustainable fiscal path. Unfortunately, there are no easy solutions to these challenges, and various commissions and proposals have failed to truly reduce the size of annual budget deficits.
As significant as these issues are, it’s also important to avoid overreacting with our investment portfolios. While past fiscal challenges and downgrades have led to uncertainty, markets have historically recovered and stabilized over time. A disciplined investment approach focused on long-term goals, diversification, and investment fundamentals – rather than on Washington headlines or hope that Congress will solve the deficit problem – is still the best way to achieve long-term goals.
The downgrade by Moody’s comes at a critical moment as investors shift their attention from tariffs to Washington’s budget proposal. While markets performed well following last year’s presidential election partly on expectations of pro-growth policies and an extension of the Tax Cuts and Jobs Act of 2017 (TCJA), the Moody’s announcement serves as a reminder of the other side of the fiscal situation.
Specifically, Moody’s emphasized that “successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” and that they “do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
Tax Cuts and Jobs Act provisions are on track to be extended or made permanent
Perhaps not coincidentally, Congress is in the middle of crafting a new budget bill, and some provisions are still evolving. The latest proposal aims to provide certainty by extending the individual tax cuts from the TCJA, which would otherwise expire at the end of 2025.
This would avoid a potential “tax cliff” – a scenario where tax rates would revert to pre-TCJA levels, potentially creating economic disruption. By addressing these concerns well in advance of the expiration, policymakers hope to provide stability for both consumers and businesses.
The comprehensive tax package contains numerous provisions affecting both businesses and individuals. Key elements, which are subject to change, include:
For Individuals:
For Businesses:
Notably absent from the proposal are provisions for a “millionaire tax” and changes to carried interest tax treatment, which some had anticipated. The debt ceiling, which represents how much the country can borrow, could also be raised by $4 trillion.
Deficits may continue to add to the debt
While the latest proposal includes approximately $1.6 trillion in spending reductions through changes to programs like Medicaid and nutrition assistance, they are outweighed by tax cuts and spending increases in other areas.
Annual budget deficits matter because they add to the national debt, which already exceeds $36 trillion, or about $106,000 per American. It’s reported that the proposed budget could add an estimated $3 trillion or more to the debt over the next ten years. The most recent estimate by the Joint Committee on Taxation, a nonpartisan committee of Congress, showed that the debt could increase by $3.7 trillion over this period.
It’s no secret that the national debt has grown considerably in recent decades, with interest payments continuing to rise. Given that most federal spending is allocated toward mandatory programs like Social Security and Medicare, it’s politically difficult to agree on significant spending cuts. This is why some worry that tax rates will eventually need to rise to make up the difference, even though the TCJA may be extended or made permanent in the near term.
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.
Ironically, some of the strongest market returns over the past two decades have occurred after the worst deficits, since these usually coincided with economic crises when markets were at their lows. In other words, making investment decisions based on government spending and deficits would have been counterproductive.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
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