"Market sentiment is fragile", JPMorgan's Marko Kolanovic writes, in a note dated Wednesday.
Amid the trade frictions and mounting uncertainty, discretionary investors have trimmed their exposure to stocks, with hedge funds' net exposure now in just the 5th percentile. Gross exposure, Kolanovic writes, is elevated, reflecting longs in defensives and shorts in cyclicals and value, as dictated by the macro backdrop.
Overall, Kolanovic maintains a constructive outlook, as he has since the beginning of the year, when he called for quick return to all-time highs, a prediction that played out in short order. That said, he describes his stance as "cautiously positive". That professed caution is, of course, the product of an inability to predict what the Trump administration might do next.
"Given the recent erratic behavior of the US administration [a positive outlook] carries risk", Marko writes, before explaining that despite political entropy, "we think that low investor positioning and an unprecedented divergence between defensive and value market segments warrant exposure to trade-sensitive and high-beta segments, which are now largely pricing in a recession."
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