Are the downgrades and outlook cuts "in the market" as so many agued today? When Moody's and Fitch take the ax to whole countries, doesn't everyone expect it and therefore it doesn't matter?
Because a lot of money is run strictly by the agency watchwords, in that many, many institutions can't hold on to paper that is downgraded from where they bought it because of charter reasons. You may think that it's wrong or silly. You make think the agency raters are such a bunch of empty-headed simpletons that it doesn't matter, but it is how the ratings are used. They are red flags, and institutions dump when their bonds get downgraded, particularly because when one is downgraded, you can just go buy another that still fits your criteria.
Of course, it is just as important to consider that lowered outlooks make it harder for countries to refinance their debt -- it's more costly, and tougher to find buyers. In this environment, that means higher rates and lower prices for existing bonds that might be held by banks which lent against those bonds as if they were cash. Now they need to sell to raise money to meet capital standards.
That means that when you get to this critical phase, not like the AAA to AA phase for the U.S., that there's a real and very negative impact.
Does that mean the stock market can go higher Monday? Sure, the linkage isn't minute to minute. But these downgrades aren't going to stop. They are going to accelerate if we don't get growth in their economies or help from the richer countries. Neither seems likely.
So stop thinking they are "in" the market and instead think about how to protect yourself. That's what matters.