According to an analysis by JPMorgan, the recent decline in the U.S. stock market does not appear to be due to concerns about an impending recession. The analysis highlights the growing uncertainty regarding the impact of President Donald Trump’s tariff plans on the economy, trading relationships, and the labor market, alongside persistent inflation affecting household budgets.
JPMorgan analysts, led by Nikolaos Panigritzoglou, noted in a recent report that U.S. growth concerns linked to tariff uncertainties are frequently cited by clients as a significant reason for the recent market downturn. The report indicates that the inferred probability of a U.S. recession has been gradually increasing across various asset classes as risk markets face losses and U.S. Treasury yields decline.
However, the review by JPMorgan suggests that the market correction may primarily involve quantitative hedge funds employing algorithmic strategies to modify positions, rather than a widespread fear of a recession. The analysts pointed out that credit markets provide less recessionary signals compared to equities and bond benchmarks.
As of March 11, indicators showed varying implied probabilities of a recession: the S&P 500 Index suggested a 33% chance, the 5-year Treasury a 46% chance, base metals 45%, and the Russell 2000 Index a 52% chance. In contrast, U.S. high-grade credit markets indicated only a 12% recession chance, and U.S. high-yield credit markets just a 9% probability.
The analysts questioned what might be causing the correction in U.S. equities, especially the Nasdaq, if credit markets downplay U.S. recession risks. They believe retail investors are not to blame as they continued buying the dip over the past weeks. Instead, they identified equity hedge funds, specifically Equity Quant hedge funds and Equity TMT Sector hedge funds, as likely contributors to the recent downturn. Traditional hedge funds focusing on long or short equity positions seemed to have less impact.
If their assessment is accurate and quantitative hedge funds were more influential than discretionary managers in the market shift, the recent correction in U.S. equities may align more with fundamental managers reevaluating recession risks. If U.S. equity ETFs continue to experience inflows, the analysis suggests that a substantial portion of the recent market correction might be over.
