Effect of S&P's Downgrade on US Treasury Debt on the Stock Market

How will the stock market open on Monday, August 8, after Standard and Poor's downgraded US Treasury debt from AAA to AA+?  It could go either way -- up or down -- depending on whether or not investors were already expecting the downgrade. 

Surely, S&P had been telegraphing for weeks its intentions, depending on how the debate on Capitol Hill related to the debt ceiling turned out.  S&P stated previously that unless there was a credible plan put on the table to reduce spending by $4 trillion dollars that the company would downgrade US Treasuries.  When the final agreement came in with a proposed reduction in spending (from the "baseline" level) at about $2.1 trillion over a 10 year period, it should have come as no surprise that S&P would downgrade the US government's debt.

However, investors may not have paid enough attention to the specifics of S&P's warnings. In this case, we could expect a negative tone to the stock market on Monday.  It all depends on how professional investors and retail investors react to the news.

It is very likely that the news leaked out to Wall Street's professional investors just before we saw the 512 point drop of the Dow Jones Industrial Average on Thursday.  After all, S&P contacted the Treasury Department before the downgrade, and it would have been pretty easy for the news to have filtered out to Wall Street traders before the downgrade was publicly announced on Friday evening.  If the news had already leaked, and had been incorporated into the stock market's valuation, then Monday may not be a down day for the stock market.

But don't discount the power of retail investors (those who do not manage money professionally, but instead manage their own money, work for a living and have not been keeping up with the possible implications of the debt ceiling deal) to make a statement of their own.  If they were caught unawares, it is quite possible that this contingent will make its feelings known on Monday.  If this is the case, we can expect a drop in the stock market averages, perhaps a big one.

Right now, I am preparing my shopping list for when the time will be right to invest the cash in my client accounts that is now sitting on the sidelines.