According to Bloomberg: On Monday, during a significant trillion-dollar selloff, big-money investors deviated from the typical retail investor strategy by buying the dip. While many inexperienced investors sold off their holdings, hedge funds that engage in both bullish and bearish equity strategies aggressively purchased individual US stocks at the fastest rate since March. This shift reversed a prolonged period of selling, as reported by Goldman Sachs Group Inc.’s prime brokerage.

Goldman Sachs FICC & Equities and Prime Services data as of Aug 6Source: Goldman Sachs FICC & Equities and Prime Services

JPMorgan Chase & Co. also highlighted that institutional investors netted $14 billion in shares during the downturn, which caused a 3% drop in the S&P 500 Index. The actions of these professional traders, who chose to re-enter the market on one of the worst trading days of the year, support various bullish perspectives. Among these is the notion that the current market volatility is an overreaction to economic data that has not yet confirmed a recession. The swift recovery of stock prices from the day's lows indicates that hedge funds might have made a timely move.

Max Gokhman, senior vice president at Franklin Templeton Investment Solutions, compared the market situation to finding a designer bag with a slight discount. "It's still very expensive, but you can tell yourself it's a deal," he said, reflecting on the high valuations despite the dip.

Following Monday's downturn, the S&P 500 Index rebounded by approximately 1% on Tuesday, and the Nasdaq 100 Index saw similar gains. Wall Street's main volatility measure, the Cboe VIX Index, dropped from its highest level since 2020, as did the VVIX Index, which tracks VIX volatility.

Despite the recent recovery, uncertainties remain. Key concerns include high spending on artificial intelligence by major tech firms, relative to immediate returns, and worries that the Federal Reserve might delay reducing interest rates. The recent rotation by professional investors back into US stocks comes after hedge funds spent several months divesting from individual shares, with July witnessing the most significant withdrawal in notional value since 2016, according to Goldman Sachs data.

Jonathan Caplis, CEO at PivotalPath, a hedge fund research firm, noted that many hedge funds view selloffs as buying opportunities. "The majority of the managers we speak to are framing the current problems as short-term and sentiment-driven, versus a long-term issue with the fundamentals of listed businesses or even the wider US economy," Caplis explained.

Historical data suggests that the recent pullback could present an opportunity. Since 1980, the S&P 500 Index has typically generated a median return of 6% in the three months following a 5% decline from a recent high. However, Goldman Sachs' strategy team, led by David Kostin, warned that the outlook could differ significantly if the decline occurs in a context of resilient economic growth versus a correction preceding a recession.

Meanwhile, Citigroup Inc.'s strategy team cautioned that "recessionary scenarios are by no means priced in." Beata Manthey, a Citi strategist, advised "buying into weakness," but noted that they would prefer to see "evidence of a more complete positioning unwind" before feeling fully confident in this strategy.