📝Systematic And Discretionary Funds Positioning Remains Low: J.P. Morgan

At roughly 4300, the S&P 500 was about 10% away from our year end price target of 4800, which is less than 1 standard deviation based on the current market volatility and the appropriate time horizon. At the same time, the most common `bearish' price target of 3500 is about 2 standard deviations away. If one had purchased 1 share of the S&P 500 every day of this year, this overlay strategy would be up 1.6% year to date. Buying 2% dips (from e g trailing 1 week highs) would produce a 3% return, buying 3% dips would produce a 5% return and so on. Buying on weakness so far yielded positive returns and has worked better, than e g suggestions to stay out of the market and start 'nibbling' at 3500 or 3300, levels that have not been reached. Even with this in mind, our suggestion was and is not to buy the S&P 500 as a whole, and we remain open to a possibility that the final S&P 500 price slightly underperforms our target. We continue to advocate staying away from expensive defensive segments and recommend buying sectors with attractive valuations such as Energy, which remains by far the best performing sector this year (with significant further upside remaining) and pointed to distressed high beta and small cap segments near their lows (e.g. biotech that is now up —50% from the May lows). We are again out of consensus and maintain that inflation will resolve on its own as distortions fade and that the Fed has over-reacted with 75bps hike (of course, given that COVID and response to COVID — e.g. lockdowns and stimulus — was distorting economies for 18 months, the transient impact is expected to be on a similar time horizon — i.e. quarters, not months). On China, we expected a strong H2 recovery to lift not only Asia and Elvis, but provide support for the global cycle. That has not happened yet (and recent geopolitical developments ha•,-e further detracted from it), but we think it will happen soon and the recent softening of economic data should increase a sense of urgency to provide stronger and broader set of stimulative measures in China.

Given our core view that there will be no global recession and that inflation will ease, the variable that matters the most is positioning And positioning is still very low — for both systematic and discretionary funds it is now in the —10th percentile. The recent decline in market volatility (supported by structural factors such as gamma positioning) has been supportive of inflows from systematic investors. Alongside buybacks, these strategies can provide steady inflows of several $bn per day in equities for the next 2-3 months.

- J.P. Morgan