Jim Cramer Recalls 2011's 6.7% Market Decline After US Debt Downgrade, Says It 'Ultimately Meant Nothing:' Dan Niles Sees Limited Downside Amid Tariff Rollbacks, FOMO

Moody‘s downgrade of U.S. debt from Aaa to Aa1 marks the country’s loss of its last remaining top-tier rating, prompting market experts to weigh in on potential impacts.

What Happened: CNBC’s Jim Cramer recalled on Sunday that “the market dropped 6.7% after the last downgrade back in 2011 but it, ultimately, meant nothing.” Despite weeks of market decline following that event, Cramer emphasized investors “had to stay the course.”

Dan Niles, founder of Niles Investment Management, expects less severe market reactions this time. “Prior debt downgrades have been followed by S&P drops of 8-10%,” Niles noted, adding that “today, tariff rollbacks is driving a pickup in the economy & the decline should be less.”

Moody’s joins Fitch and Standard & Poor’s in downgrading U.S. debt below the highest “triple-A” level. Fitch downgraded U.S. debt in August 2023, while S&P’s historic first downgrade occurred in August 2011.

The 2011 S&P downgrade shocked markets, coming after the S&P 500 had doubled from its 2009 Great Financial Crisis lows. The index plunged 6.7% the following trading day, ultimately falling 8% from the downgrade in October 2011.

Fitch downgrade contributed to a 10% S&P 500 decline from July to October 2023, exacerbated by inflation concerns and rising 10-year yields.

Niles believes current conditions differ significantly. “Unlike in 2023 or 2011, the economic environment is improving around this debt downgrade,” he wrote, citing reduced China tariffs driving trade resumption.

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Why It Matters: Market support could come from retail investors experiencing FOMO (fear of missing out) and professional investors who missed the recent 20% rally from April lows. The AAII survey recently showed bulls surpassing bears for the first time during this rally, according to Niles.

Moody’s cited persistent fiscal deficits and rising government debt as key factors in its decision. The agency projects U.S. debt-to-GDP ratio will climb from nearly 100% in 2025 to around 130% by 2035.

“Even in a very positive and low probability economic and financial scenario, debt affordability remains materially weaker than for other Aaa-rated sovereigns,” Moody’s stated.

The SPDR S&P 500 ETF SPY and Invesco QQQ Trust QQQ both slipped in Friday’s after-hours trading following the announcement.