Are we at the cusp of a correction ?

Many people are waiting for interest rate cuts, thinking they will boost the market. However, historical data, especially from the US markets, shows that rate cuts often signal a market top.

Historical Patterns of Rate Cuts

Looking at past data, we see a clear pattern. The white line on the chart represents the three-month treasury bill with a 52-week moving average. When rates peak and then start to fall, the market often corrects. This pattern has repeated itself in 2001, 2007, before COVID in 2019, and so on. Every time rates dropped into a new cycle low, markets saw significant corrections.

Market Corrections Following Rate Cuts

For example, in 2001, there was a 41% correction. During the Global Financial Crisis (GFC), the market corrected by 55%. Even during COVID-19, there was a 24% correction. Now, we are at the top of another interest rate cycle. How much the Indian market will be affected by a potential US market correction is uncertain, but the historical data suggests we can’t ignore this pattern.

Expectations vs. Reality

The market often anticipates events before they happen. Even when interest rates are rising, the market may expect future cuts. This expectation can lead to rising stock prices, despite the actual economic conditions not supporting such growth. Initially, there were expectations of seven rate cuts in 2024, then five, then three, and now just one. Despite these changing expectations, the pattern of corrections following rate cuts has remained consistent.

The Indian Market Perspective

The Indian market might behave differently from the US market. Domestic funds and a unique interest rate cycle could mean that India’s market won’t follow the US market exactly. While the US might cut rates, India’s cycle might not align perfectly, providing some buffer. However, it’s still possible that India will face some correction if global patterns hold.

If interest rates are cut and the market doesn’t fall, it will be an outlier in historical data. But if a correction happens, it will confirm the pattern. It’s a crucial time for investors to watch the market closely.

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