An analysis by JPMorgan indicates that the recent sell-off in the U.S. stock market isn’t primarily fueled by fears of an impending recession, a new analysis from JPMorgan Chase has found. Democrats have claimed there is ‘rising uncertainty’ surrounding the impact of President Donald Trump’s tariff plans on the economy, U.S. trade relationships, and the labor market, along with persistent inflation putting pressure on American households, are key factors contributing to the downturn, but the new analysis refutes that.
“U.S. growth concerns due to tariff uncertainty is often mentioned in our client conversations as a major reason for the recent U.S. equity market correction,” wrote a team of J.P. Morgan analysts led by Nikolaos Panigritzoglou last week. “Indeed on our estimates, the implied probability of a U.S. recession embedded across asset classes continued to creep up over the past week as risk markets suffered losses and as U.S. Treasury yields decline.”
JPMorgan analysts suggested that the correction was primarily due to quantitative hedge funds employing algorithmic strategies to adjust their positions rather than being driven by recession concerns, Fox Business reported. “The recent U.S. equity market correction appears to be more driven by equity quant fund position adjustments and less driven by fundamental or discretionary managers reassessing U.S. recession risks,” they wrote.
The report highlighted that credit markets are indicating a lower likelihood of recession compared to equities and a bond benchmark. As of March 11, the S&P 500 Index implied a 33% probability of recession, while the 5-year Treasury suggested a 46% chance, base metals 45%, and the Russell 2000 Index 52%. In contrast, U.S. high-grade credit markets indicated only a 12% recession probability, with U.S. high-yield credit markets showing just a 9% chance.
“If one puts more weight on credit markets and dismisses U.S. recession risk, what then explains the correction in U.S. equities and in particular Nasdaq? Looking across investor types, retail investors are unlikely to be the culprits,” the analysts wrote. “As we highlighted in our recent publications, retail investors continued their ‘buying the dip’ behavior over the past three weeks.”
“In our mind the most likely culprits are equity hedge funds and in particular two categories: Equity Quant hedge funds and Equity TMT Sector hedge funds,” the analysts said. They observed that traditional hedge funds, which focus on long or short equity positions, had a diminished impact during the pullback because their equity beta, a financial metric, had increased in February, Fox Business added. As of Monday afternoon, all the major Wall Street indices — the DOW, the Nasdaq, and the S&P 500 — were all up.
“If the above assessment is correct and equity quant hedge funds played more of a role than their discretionary counterparts, then the recent U.S. equity market correction would appear to be more driven by fundamental or discretionary managers reassessing U.S. recession risks,” the analysts explained. “And if U.S. equity ETFs continue to see mostly inflows as they have thus far, there is a good chance that most of the current U.S. equity market correction is behind us.”