Aniket PujariFears of an economic recession have been cited as a catalyst for the stock market’s horrid run this week. JPMorgan thinks something else may be driving the downturn. “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,” strategist Nikolaos Panigirtzoglou wrote in a note to clients. Quant funds use an array of quantitative tools, including software models, to look for buy and sell signals across asset classes, including equities. “Provisional data of monthly reporting hedge funds … imply a big drop in the equity beta of these two types of hedge funds in February vs January pointing to position reduction,” Panigirtzoglou noted. He added that the bank’s S & P 500 and Nasdaq position proxies showed the lowest exposure to these benchmarks by funds going back to the fourth quarter. Stocks have taken a beating this week. The S & P 500 is down about 3% and briefly dipped into a correction, down more than 10% from a record close set in February. The Nasdaq Composite has lost 3%, trading more than 12% below a high water mark reached in December, on pace for its fourth straight weekly decline. .SPX .IXIC 3M mountain SPX and Nasdaq 3-mo chart However, there may be a silver lining here, according to JPMorgan. If this 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 equity quant fund position adjustments and less driven by fundamental or discretionary managers reassessing U.S. recession risk,” the bank said. “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.” Elsewhere Thursday morning on Wall Street, D.A. Davidson upgraded Microsoft to buy, saying the Windows and XBox parent can withstand a consumer slowdown better than most major tech companies . “We see Microsoft as the best positioned Mag6 for a consumer slowdown, which will make it a key shelter in the storm,” analyst Gil Luria wrote in a client note. “While the extent of the consumer slowdown may still be unclear, we believe some slowdown is more likely than not. This would mean less risk for Microsoft’s earnings estimates than the rest of the mega caps, making it the most likely of the Mag6 to become defensive.”
