Market Minute: Equity Market Rebound is a Conditioned Response

The conditioned response to any major market pullback is to buy the dip. The upcoming September interest rate cut panacea has nearly erased all the losses endured by the S&P 500 since mid-July. After the Fed decided to hold rates steady at its last two-day meeting, equities slumped, even though Powell seemed to signal that rate cuts could be coming as soon as September. That, added to the abrupt unwinding of part of the yen carry trade, seasonal weakness, signs of difficulty in the U.S. jobs market, and an evident moderation in inflation, provided the trigger for investors to make an abrupt move to sell. Every market correction occurs for different reasons, and the most recent swoon was no different. It just so happens that multiple variables collided at once, triggering a liquidity gap and a tremendous spike in volatility.

Rate cuts do not necessarily signal a healthy economy, but a slowing one, and the rise and fall in stocks follow the economy. The expectation of a rate cut as bullish for the markets persists as the status quo narrative, but buying pressure may diminish as the actual policy shift commences. If we look at the long-term trend, the equities are in a cyclical bull market, and the month-long market retracement and recovery may seemingly appear as a contextual trading range. However, traders need to be aware that the rise in volatility is a function of policy transition. A shift in monetary policy will lower the cost of financial capital but is also a sign of lower investment demand. Political transition can be messy, and the Federal fiscal year budget renews in September, which is typically a weak month for equities. The market dislikes uncertainty and investors are seemingly in the mood for using any justification to book recent gains and reevaluate.