Not everything went as expected. Some analysts had worried that Treasury yields would surge after S&P's downgrade. That would happen if investors demanded higher returns to compensate for their risk.
The opposite happened. Treasury yields dropped Monday as investors sought a safe place for their cash. Their actions showed continued confidence in long-term U.S. debt.
Here are some questions and answers about the market's turmoil Monday:
Q: Why are stock prices plunging?
A: Stocks are considered risky, especially when the economy
falters. When the economy is growing, companies can expand, hire
and increase profits. A string of bad economic data has led many
investors to worry that the economy will dip back into recession.
If that happens, stocks would likely slide further. Investors
already were growing fearful about the economy before S&P's
announcement Friday night. Oil prices also are falling, a sign that
traders expect the weak economy to reduce demand from consumers and
businesses.
Q: If everyone is selling stocks, where's that money going?
A: Anywhere safe. Traders are plowing cash into investments that
are seen as hedges against economic weakness. Gold prices streaked
past $1,700 for the first time Monday. And the yields on debt
issued by the U.S. Treasury fell as traders, money managers and
overseas banks sought refuge from the market's wild swings. Bond
yields fall as their prices rise.
Q: Why are Treasury prices rising? Didn't S&P just indicate that
they are a riskier investment?
A: Investors remain confident that the Treasury will be able to
pay its creditors, downgrade or not. And Treasurys are still the
world standard for safe, stable investments that can be converted
into cash easily. Other nations with AAA ratings have much smaller
economies and issue much less debt. When investors seek safety,
they don't have many options other than Treasurys.
Q: If the S&P downgrade isn't driving all this selling, why are
markets plunging now? After all, the economic data was relatively
encouraging on Thursday, when the Dow had its worst one-day point
drop since 2008.
A: Things are looking grim in Europe. Central bankers there are
trying to prevent Italy and Spain from becoming the latest nations
to default on their debts. The European Central Bank on Monday is
buying up bonds issued by those countries, to increase demand for
them. A default by Spain or Italy would be disastrous for other
nations that use the euro and could affect financial companies
worldwide.
Q: Are investors more optimistic about overseas stock markets?
A: Not at all. Stocks around the world have taken a pounding.
Even developing markets are vulnerable because of how U.S. and
European weakness could reverberate globally.