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The major headlines in the stock market today (Tuesday) include Moody's warning it might lower America's AAA rating, the trade deficit and a financial shakeup:
- U.S. Credit Rating at Risk– In a statement released Monday, ratings agency Moody's said the United States is in danger of losing its AAA credit rating if Congress cannot come up with a solid plan to lower the debt-to-GDP ratio. "If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable," Moody's said in an e-mailed statement. "If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to Aa1."
Currently Moody's rates the U.S. AAA credit rating with a negative outlook. Standard & Poor's last year downgraded the U.S. to AA+ which is the equivalent to Moody's Aa1. Both agencies cite the political bickering in Congress and inability to deal with fiscal situations as the main reasons for the downgrades. S&P has mentioned that those risks could lead to another downgrade. When President Obama updated his federal budget in August the debt-to-GDP ratio was projected to be 75% by 2022, currently it is just over 1.04%. If lawmakers decide to go off the fiscal cliff as a debt reduction measure Moody's said it will maintain its current rating and negative outlook and then wait to see results of the fiscal cliff before deciding to return to a stable outlook.
- Trade Gap Widens– As global economies struggle demand for American products slowed, leading to the first widening of the trade deficit in four months. The monthly trade gap grew 0.2% to $42 billion in July from a downwardly revised figure of $41.9 billion in June. The U.S. saw its largest trade shortfall with China ever in June as that number reached $29.4 billion and the trade deficit to the European Union was $12 billion, the highest since October 2007. "Export growth over the next few months, at least, should be relatively weak," Jay Bryson, senior global economist at Wells Fargo Securities LLC in Charlotte, North Carolina told Bloomberg News. "It's starting to reflect some weakness in the rest of the world and trade will probably be somewhat of a net drag on growth in the third quarter."
- Legg Mason CEO steps down– Baltimore-based money manager Legg Mason Inc. (NYSE: LM) announced that Chief Executive Officer Mark Fetting will step down effective Oct. 1. Fetting took over the company in early 2008 as the financial crisis was worsening and has failed to turnaround the company and its share price. Job and debt cuts did little to combat the fact that the company's funds have had a poor return in his tenure at Legg. July marked the 19th consecutive quarter that investors withdrew more funds than invested with Legg and the company's stock price has lost 65% in value since Fetting took over. Joseph A. Sullivan, head of global distribution, will become interim CEO while the board searches for a permanent successor. LM stock is up almost 6% today.
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