Inside Markets — Rebound

The SPX has already experienced a functional correction of -8.5% and is now rebounding off short-term oversold levels. The only other pullback this year of any size occurred in April when the SPX lost -5.5% before rebounding off short-term oversold levels to return +14% in three short months. While it may be tempting to use the April experience as a template for today’s market, it’s important to recognize some key fundamental differences. The pullback in April was based on a spike in bond yields after some hotter-than-expected inflation readings. The late-April rebound in the SPX from oversold levels happened after 10-year yields failed to break above levels from November, let alone cycle highs from October. Growth data remained resilient, credit spreads remained narrow, equity volatility remained subdued, momentum stocks were still leading and the yield curve remained inverted. The current correction comes with weaker growth data (ISM manufacturing and July Jobs), widening credit spreads, a spike in volatility, defensive sector (Utilities) leadership and a dis-inverted yield curve. A steepening yield curve implies future Fed rate cuts, which would be bullish for stocks if those other conditions weren’t present. The current correction will end when there’s evidence that the economy remains in growth mode. The SPX should rally ahead of evidence of improved economic growth, but the current rebound is meaningless until the index can sustain levels north of the post-payroll downside gap from 5447.