US Equity Market's response to possible Fed rate hike tomorrow

Here's what John Hussman had to say about this matter in his weekly newsletter this week.

“First and foremost, the response of the equity markets to Federal Reserve easing (and much other news) is conditional on the risk-tolerance of investors at the time, which we infer from observable market action such as internals and credit spreads, among other factors. Quantitative easing ‘works’ by creating default-free liquidity in an environment where that liquidity is viewed by investors as an inferior asset. That is, if investors are risk-seeking, as inferred from the uniformity of market action across securities, sectors and asset classes of all risk profiles, then yes – Fed easing will tend to support further advances in stock prices regardless of the level of valuation. On the other hand, once investors have shifted toward risk-aversion, overvalued markets become vulnerable to abrupt free-falls and crashes, and monetary easing is not materially supportive for stocks because default-free liquidity is desirable. [Highlights in bold are mine.]"

In previous weeks and months, investors have been shifting to risk aversion, according to Hussman's inferences from observable market action. This means that downside risk exceeds upside potential ...

Hussman further says in this week's newsletter that,

"A quarter-point hike will not cause anything. The causes are already baked in the cake. A rate hike may be a trigger with respect to timing, but that’s all. [Highlight is mine.]"

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