Investor reaction to the Standard & Poor's warning about burgeoning US fiscal problems was swift if unpredictable: Bonds and currencies, which otherwise might have fallen, gained, while stocks, which could have benefited, lost.
The S&P cut to the US outlook, after all, should have reflected itself in the nation's credit quality.
That in turn would have hit debt prices and shaken faith in the currency. At the same time, equities should have gone on their merry way on the belief that the money flowing out of fixed income would have found a home in stocks.
Seeing that none of the logical events actually occurred led to the belief in some quarters that the reaction from capital markets to the S&P move was a lot less than met the eye.
"The whole thing makes no sense to me," said Aaron Gurwitz, chief investment officer at Barclays Wealth in New York. "I can't tell a consistent story that explains all of these facts. My working hypothesis is this whole thing is ephemeral—people were looking for a reason to sell stocks today."
From an investment perspective, Gurwitz said the only real takeaway is perhaps a less constructive view on the US dollar, which continues to be in jeopardy of losing its status as the world's reserve currency. Even in that case, the dollar gained Monday as measured against a basket of foreign currencies.
Gurwitz, like others, expects the stock plunge to be a short-term event that will lose steam quickly.
"We're encouraging our clients everywhere and in the US in particular to ask, 'What percentage of my assets are denominated in dollars?'" he said. "If it's about 85 percent, then people may want to think about diversifying a little bit more."
But elsewhere, it was almost as if the steep sell off in the stock marketwas happening on some other plane.
Theories regarding the day's pullback ran beyond the S&P move, and many strategists advised against using the news as a selling point. Dave Lutz, managing director of trading at Stifel Nicolaus in Baltimore, surmised that it was far more about a rally in the yen than a threat of US debt default.
Others, in fact, said pay no attention to the pullback, or at worst use it as reason to build up some more stocks.
"The more likely outcome is this is a buying opportunity," said James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. "We're down almost 2 percent today because of some agency's stated opinion on something. There's a lot of opinions every day. It's not like there's a fundamental change from where we were last Friday."
In fact, several economists said the S&P warning could serve as an effective cattle prod to get Washington's warring parties to the bargaining table.
"S&P's actions could help advance the process toward a long-run strategy," David Resler, chief economist at Nomura Securities in New York, wrote in a note to clients. "By entering the debate in this way and at this time, S&P has served a useful public service by putting all parties on notice that words and actions in the political debate have consequences."
John Higgins, senior market economist at Capital Economics in London, combined the theme of a buying opportunity with the notion of good timing by S&P—even as Paul Ashworth, his Toronto colleague and chief US economist at the firm, said it was "hard to argue" with the downgrade.
"Investors might come to see S&P’s decision in a positive light if it prompts Congress to focus on delivering a credible deficit reduction plan," Higgins wrote in a research note. "After all, the rating agency’s decision to put the UK’s AAA-rating on negative outlook in May 2009 fueled a debate on the need for massive fiscal tightening, and the tough decisions taken by the new coalition government were eventually rewarded by S&P with the UK’s outlook being revised back up to stable in October last year."
Indeed, those looking for positive straws to grasp at considering the S&P's bleak assessment of US finances turned their gaze around the world and found few rivals for the dollar and the US as an investment destination.
"In this world today, the United States, from the size of capital markets and its political system, even though we're all frustrated, screams out stability," said Bob Andres, CIO at Merion Wealth Partners, in Berwyn, Pa. "That's reality vis-a-vis the rest of the world. With the amount of money out there there's not a lot of capital markets that do what the United States does, so where are these guys going to go?"
Still, disregarding the S&P warnings comes with risk, particularly if all of the buoyant voices are wrong and Washington pays no heed to S&P's shot across the bow.
The Federal Reserve can't keep printing money forever to pay the US debt, and the market faces its sternest test yet in two months when the central bank pulls its Treasury-buying program that has injected so much liquidity into the investing stream.
If any reason, then, is to be taken from Monday's market action, it's that for once the equity side, rather than the bond crowd, may become the new vigilantes. That's usually the job for fixed income, but short-dated Treasurys recouped lossesthat came immediately after the S&P news broke.
"It's just a warning, and there's still enough credibility in the government that the drop in price and rise in yields was attractive to some investors considering what's going on in Europe," said Kim Rupert, managing director of global fixed income analyst at Action Economics in San Francisco. "There's going to be a day where that's not going to happen unless we start to get our house in order."