Jeff Sica of Sircle Squared Alternative Investments says inflation is the economy's carbon monoxide.
An analysis by JP Morgan suggests that the recent sale of US stock markets is not driven by concerns that the economy will fall into a recession.
Increases uncertainty about the president's impact Donald Trump's Tariffs have plans for the economy, US business relationships and labor markets, and stubborn inflation continues to strain American households.
“The concerns about US growth due to tariff uncertainty as the main reason for the recent US stock market revisions are often mentioned in client conversations,” wrote a team of JP Morgan analysts led by Nikolaos Panigritzoglou last week. “In fact, our estimates show that as risk markets suffer losses and the US Treasury declines, the tacit odds of a US recession embedded across asset classes have crept in over the past week.”
However, a review of JP Morgan Analysts suggests that the revision could have been caused primarily by quantitative hedge funds that use algorithmic strategies to adjust positions rather than recession concerns.
Consumers loading alcohol as Trump threatens large tariffs on alcohol from the EU
JPMorgan analyst reports suggest that the market sale was not driven primarily by the fear of a recession. (Photo by Ryan Rahman/Pacific Press/Lightrocket: via Getty Images/Getty Images)
“Recent US stock market revisions appear to be driven by adjustments in stock volume fund positions and not so much by basic or discretionary managers reassessing the risks of a US recession,” they write.
The report points out that credit markets are sending less recessional signals than stock and bond benchmarks.
As of March 11, the S&P 500 index suggests that 33% imply a recession probability, while the 5-year Treasury Department implied a 46% probability, a 45% basic metals, and the Russell 2000 index implied a 52% probability. In contrast, the US luxury credit market implies a 12% chance of a recession and a 9% chance of a high-yield credit in the US.
“I'm not worried” about long-term market issues
JP Morgan's report points out that the credit market has a lower recession signal than the rest of the market. (Michael M. Santiago / Getty Images / Getty Images)
“If you put more weight on the credit market and reject the risk of recession in the US, what explains the revision of US stocks, especially NASDAQ? Looking at the type of investors, retail investors are unlikely to be the culprit,” the analyst wrote. “As highlighted in a recent publication, retail investors have continued their 'buy dip' behavior over the past three weeks. ”
“In our opinion, the most likely perpetrators are equity hedge funds and two categories in particular: equity quantum hedge funds and equity TMT sector hedge funds,” the analyst said. They went on to note that more traditional hedge funds focusing on long or short equity positions have not played much role in pullback given the equity beta version, a financial indicator in February.
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“If the above valuation is correct and stock-volume hedge funds play a role more than discretionary counterparts, the recent revision of the US stock market appears to be driven more by basic or discretionary managers reassessing the risks of a US recession,” the analyst explained.
“And if US stock ETFs continue to see the main inflows like they have done so far, it's likely that most of the current US stock market corrections are behind us,” they added.
