For all the anxiety that Standard & Poor's unleashed when it downgraded the U.S. credit rating on Friday, markets reacted with barely a shrug on Monday.
Make no mistake: Stocks were pounded in another rout, pushing major indexes deeper into correction territory. The S&P 500 fell 6.7 per cent, bringing its total decline since April to 17.9 per cent.
These represent alarming losses for investors, and many observers are scratching their heads over what will bring back some sense of stability to stock markets after a particularly volatile couple of weeks.
However, blaming the setback on the Standard & Poor's downgrade doesn't appear to make much sense at this point.
The clearest evidence: Even though Standard & Poor's declared that U.S. bonds no longer deserved a top-notch triple-A credit rating, investors embraced those bonds enthusiastically.
U.S. government bonds surged on Monday, sending yields down. The yield on the 10-year U.S. Treasury bond slipped below 2.4 per cent for the first time since October and challenged lows last seen during the financial crisis.
"This amounts to a massive market rejection of S&P's concerns," Paul Krugman, the Princeton University professor and New York Times columnist, said on his blog. "The 'signature' of debt concerns should be stock and bond prices both falling; what we actually see is those prices moving in opposite directions."
It is also hard for a downgrade of U.S. debt to gain much traction when big investors, including central banks, have few other places to go. The Swiss franc and gold markets just aren't big enough to satisfy demand.
David Rosenberg, chief economist and strategist at Gluskin Sheff, argued that for all intents and purposes, the world will continue to treat the U.S. credit rating as top notch, in spite of the downgrade.
"The U.S. can print its own money and certainly has the wherewithal to pay its debts, so the downgrade is more symbolic than real," he said in a note.
So why are stock markets in such a stink? Rising bonds and falling stock prices usually mean just one thing: Investors are growing very nervous about the health of the global economy – and more specifically a bout of disappointing economic data and the next phase of the European debt crisis, which has been showing clear signs of spilling into Italy and Spain.
Mr. Rosenberg, who was never convinced about the lasting power of the global economic recovery, believes this downturn is more serious than the scare that sent stocks reeling last summer when Greece, Portugal and Ireland were the focus of concern.
The European debt crisis now involves bigger economies, such as Spain and Italy, and has raised concerns about the health of the continent's bigger banks. Looking more widely, Mr. Rosenberg points to signs of global economic decline, including the slide in German industrial production in June, the dimming outlook for Australian economic growth and shrinking U.S. consumer spending for three successive months.
"The global economy is slowing down much faster than was the case then [in 2010]and the problems surrounding sovereign government debt are far more acute," he said.
But at least one aspect is the same: As investors scramble for cover from the volatility, they are turning to the same havens. Standard & Poor's might be taking a dimmer view of U.S. government bonds, but everyone else can't get enough of them.
David Berman