Chart of the week

Institutions remain cautious, despite market rally

Market sentiment has shifted recently, but there are still reasons for caution. This week’s chart looks at institutions’ somewhat neutral positioning.

July 21, 2023

Institutional investor equity positioning (percentile relative to history)

Source J.P. Morgan, based on institutional client survey as of July 16, 2023.

  • Economic sentiment has seen a notable shift recently in the face of resilient consumer spending, improved consumer sentiment and rapidly cooling inflation, punctuated by June’s CPI report. 
  • Amid the improved economic data, markets have embraced a full risk-on mode. The S&P has risen nearly 9% since May while high yield bond spreads have rapidly fallen back to their year-to-date low. (Spreads refer to a bond’s yield above Treasuries, or the risk-free rate.)
  • A note of caution may still be warranted, however, as markets remain vulnerable to rounds of volatility. The chart highlights select institutional investors’ hesitance to adopt a full risk-on mode despite the market rally. As it shows, 42% of investors still consider themselves to be positioned relatively bearishly (orange lines in the 50th to 100th percentile) while more than one-third (37%) consider themselves positioned neutrally (40th to 60th percentiles).1
  • Indeed, there are reasons for caution. Inflation has clearly downshifted; however, core monthly data has yet to signal that the Fed’s job is complete. Forward-looking indicators, including initial jobless claims, also continue to sound alarms bells that the recent economic revival may be just one chapter of a larger story.
  • Against this backdrop, individual investors might consider the recent bull market a good opportunity to diversify their portfolios in an effort to seek lower or uncorrelated sources of return.

  • J.P. Morgan, based on institutional client survey as of July 16, 2023.

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