🎙️ Historic Downgrade

It’s like 2011 all over again. No, Party Rock Anthem isn’t topping the music charts. Instead, the U.S. government’s credit rating is being downgraded 👎

This time, by the credit rating agency Fitch, though last time around, it was S&P who gave the U.S.A. bad marks. What does it mean?

For starters: a rough day for stocks — the Nasdaq index fell over 2%, its worst one-day performance since February.

We’ll dive in further in our top news story today. Read on.

— Shawn, Matthew, and Weronika

Here’s the rundown:

Today, we'll discuss the three biggest stories in markets:

• The U.S.’s credit rating downgrade

• Behind Starbucks’ record sales

• Companies spend extra time training new hires

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

 🤯 Fitch Downgrades the U.S. (Bloomberg)

For the second time in 12 years, one of the big three credit rating agencies is downgrading the U.S. 

These firms generate comprehensive reports assessing the credit quality (likelihood of paying back debts) of private companies and governments, and investors rely on them to do the dirty work in evaluating a borrower’s financial health.

• The credit ratings these firms provide serve as a baseline reference point for investors in determining what price to pay for the bonds they issue to raise money.
  

• Generally speaking, a higher credit rating indicates a good bill of financial health, meaning investors are more willing to lend that borrower money at lower interest rates, given the lower risk of not being paid back.

Yesterday, Fitch cut its top-tier sovereign rating for the U.S. down one notch from AAA to AA+, the second-highest rating of 10 possible scores.

• For the U.S. government, two of the three major rating agencies (Fitch & S&P) no longer give it a perfect score, while the third (Moody’s) hasn’t yet changed its rating.

Their logic? “The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades,” Fitch said in a statement.

• That “erosion of governance” has “manifested in repeated debt limit standoffs and last-minute resolutions.”
  

• Translated: Tax cuts, big government spending programs, and concerns over the repeated “debt ceiling” political battles in recent years all undermine America’s creditworthiness in the eyes of investors, especially compared to other countries with perfect credit ratings.

It’s little surprise, then, that Fitch’s decision follows this year’s debt ceiling standoff in May, when the firm first warned it was reviewing the U.S.’s rating.

The backstory: The decision is controversial, to say the least. The last time this happened (2011), S&P did the downgrading and accused the government of “retaliation” via a $5 billion fraud lawsuit in response to lowering the country’s credit rating.

• Just two weeks after the downgrade, the Securities and Exchange Commission and Department of Justice announced an investigation into S&P.

Why it matters:

Former Treasury Secretary Larry Summers and the prominent economist Mohamed El-Arian, among others, are criticizing Fitch’s downgrade.

• El-Arian said he was “puzzled” by the announcement’s timing and predicted it wouldn’t carry much sway over investors. So far, the bond market has mostly shrugged off the downgrade.
  

• One investor commented, “The US is the world’s dominant power, and sure they have done some ill-advised things…but we all know they’ll eventually pay their bills.”

What’s next: Few are likely to change their view of U.S. Treasury bonds being a safe-haven investment following the actions of a single rating agency. But moves like this incrementally degrade global financial markets’ confidence in the U.S. government’s creditworthiness.

• “Rome wasn’t built in a day, and it didn’t fall apart in a day either,” added another economist.
  

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☕ Starbucks Rings Up Record Sales (WSJ)

It’s not too early to crave pumpkin spice lattes yet, is it?

Maybe. But we at least know one thing: Consumers are splurging on large iced drinks and complex coffee beverages, which cost (a lot) more than a standard cup of black coffee.

In its earnings call this week, Starbucks says price increases have boosted revenue and helped it report record sales from its cold espresso and other elaborate drinks – some of which we can’t quite pronounce. Try saying, “I’ll have a venti iced mocha macchiato with light ice and extra whipped cream” a few times fast. It’s exactly that kind of drink that’s driving revenue growth at “Starbies.”

Keep it cold, baby: About 75% of beverage sales are now cold, a trend driven by Millennials and Generation Z, per Starbucks’ CFO, who said cold drinks are “definitely an increasing trend and we don’t see it going away.”

The numbers: Starbucks posted $9.2 billion in sales for its most recent quarter, below expectations of $9.3 billion. Quarterly revenue jumped 13% from a year earlier, but employee wage increases ate into profits.

• Executives say Starbucks is adding new ovens and coffee machines in stores, and baristas are staying on the job longer, thanks partly to Starbucks’ perks that range from a 401(k) to well-regarded health benefits and its employee stock plan.

• Starbucks also continues to invest in improving its coffee supply chain and more efficient store designs while increasing incentives for workers in a competitive, challenging labor market for service employers. The latter is key amid high turnover rates industry-wide.

On the earnings call, Starbucks executives noted they might open more stores in smaller cities, similar to Chipotle’s recent push. Unsurprisingly, Starbucks keeps betting on to-go offerings, a source of strength in recent years (drive-thru and mobile app).

Why it matters:

Starbucks' earnings matter not only because there’s seemingly one of its stores at every American rest stop. They matter because Starbucks trails only McDonald’s as the largest restaurant chain by market cap.

• The company’s results also matter because they indicate changes in consumer behavior and how consumers spend on discretionary items, such as $6 lattes and iced drinks. This year, customers keep spending on extra syrups, foams, and other add-ons, meaning they’re willing to spend more.

Zoom out: Broadly, U.S. consumer spending has cooled but remains higher than many economists had expected this year. Starbucks’ revenue growth illustrates that trend.

China loves Starbies: After the U.S., China is Starbucks’ biggest market. It wants to open about 3,000 new stores there by 2025, and its sales in China rose nearly 50% from a year earlier as the country has reopened from strict pandemic-era restrictions.

OK, enough said. Pumpkin spice, anyone?

MORE HEADLINES

📈 CVS Health beats on earnings and revenue as company slashes cost

🌴 After soaring housing costs, Miami sees first population drop in decades

💼 U.S. adds 324,000 jobs; labor market stays hot

💰 Investors staying in money market funds despite rising stocks

 😬 Employers Invest More Time In New Hires (WSJ)

Apparently, employers aren’t happy with the quality of work new hires are giving.

Employers say they invest extra time and resources in their candidate search, then spend more time training employees that aren’t quite ready to perform the job well.

• The overall labor market remains hot, as evidenced by this week’s latest ADP report showing that private companies added some 324,000 jobs last month.
  

• Despite the jobs boom, we’ve seen a decline in national productivity for the past five quarters. That’s the longest contraction since at least 1948, per the U.S. Labor Department.

What’s to blame? Namely, remote learning. Researchers say it might have restricted recent graduates’ skills and real-life experience. Since 2020, pass rates on national certifications and exams for engineers, office workers, soldiers, and nurses have all declined.

• Candidate deficiencies range widely, from fundamental specific knowledge to making changes at a register to essential soft skills such as teamwork and collaboration.

The most significant challenges with performance and learning abilities are in highly specialized fields, including medical professions and engineering.

To name a few: Around 40,000 candidates taking a popular engineering exam experienced a roughly 10% decline in scores during the pandemic.

• And about 100,000 nurses left the industry since the pandemic began, the largest decline in 40 years.
  

• Hospitals were strained, demanding more nursing programs, yet entrance exam scores have fallen 5% since the pandemic, reducing the number of eligible students to fill the open roles.

Why it matters:

One of the harshest consequences of the pandemic was cooperation and problem-solving skills. According to the Wall Street Journal, it’s resulted in a lack of readiness to perform in the workforce.

• Scores for standardized tests in college admissions, like the SAT and ACT, have fallen to 30-year lows, while high school graduation rates have also dropped.
  

• That’s translating to worse performance on the job, some employers have said.

The Bottom Line: The issue starts in the classroom. Educators and employers alike hope that the pandemic-era habits will soon be in the past. For now, they’re getting innovative.

• One college professor redesigned his approach to meet the needs of students, saying, “Reading, writing, and critical-thinking skills are not the same as they were in the past,” after narrowing his curriculum to allow students more time for fundamentals.

See you next time!

That's it for today on We Study Markets!

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