Where is the promised recession? The sudden rebound of the US stock market has caught fund managers off guard

This week, news of the suspension of tariffs between China and the United States has sparked a frenzy in U.S. assets, leading to heavy losses for investors betting on a U.S. economic recession. Many institutions were forced to close their short positions, further driving a sharp rebound in U.S. stocks and the dollar.

Previously, CCTV News reported that the Ministry of Commerce stated that the U.S. side would cancel a total of 91% of the additional tariffs, and the Chinese side would correspondingly cancel 91% of the counter-tariffs; the U.S. side would suspend the implementation of a 24% "reciprocal tariff," and the Chinese side would also correspondingly suspend the implementation of a 24% counter-tariff.

This news ignited market sentiment. The S&P 500 index has surged 3.3% since the beginning of this week, erasing all declines for the year. At the same time, the dollar strengthened, U.S. Treasury yields rose, and gold prices plummeted, with traders exiting traditional safe-haven assets.

Robert Tipp, global bond head of PGIM Fixed Income, stated:

I think the market was completely caught off guard. With tariff concessions and the agreement starting to look more likely, the market was forced to reassess and make large-scale position adjustments.

This influx of funds back into the stock market has severely impacted large asset management firms and other institutional investors, who had previously taken a cautious stance on U.S. assets due to concerns about a sharp economic slowdown and broader worries about U.S. policymaking.

Institutions Going Against the Trend Are Paying the Price

Analysis indicates that broader negative bets, including trend-following hedge funds, may have contributed to the market rally due to forced liquidations.

According to a previous article by Wall Street Journal, a Bank of America fund manager survey (mainly completed before the China-U.S. Geneva talks) showed that investors held the most pessimistic view on U.S. stocks in two years, with allocations to the dollar dropping to the lowest level since 2006.

This is supported by data from the Commodity Futures Trading Commission (CFTC), which shows that last week, asset management companies held the largest bullish bets on the euro since September 2024.

Nomura Securities strategist Charlie McElligott added,

Basically, every thematic macro trade over the past few months has gone in the wrong direction.

Retail Investors May Benefit from "Buying the Dips"

The dramatic shift in market sentiment has caused the Nasdaq Composite Index to surge nearly 30% from its low since the announcement of the reciprocal tariffs by Trump.

Data from Deutsche Bank indicates that retail investors may benefit from "buying the dips," as they have been purchasing stocks for most of April, while professional institutional investors have remained inactive.

The bank stated that the rebound in the S&P 500 index over the past month has been primarily driven by buying during regular trading hours in New York (when retail investors are most active). In contrast, institutional investors continue to see "lackluster returns" in overnight trading periods for stock futures and derivatives.

Trade Optimism May Be Overdone?

Some asset management companies warn that this shift towards optimistic trade sentiment may have "gone too far." Andrew Pease, Chief Investment Strategist at Russell Investments, stated:

Before becoming overly optimistic, we should remember the damage that policy chaos does to consumer and business confidence.

In particular, some investors believe that after the dollar rose on Monday, it fell back on Tuesday and Wednesday, and as the economic impact of the trade war becomes clearer, the dollar may weaken.

Athanasios Vamvakidis, Head of G10 FX Strategy at Bank of America, said:

My guess is that this is just a temporary relief for the dollar, and the tariff rates will be high enough to have a stagflation impact on the U.S. economy. For the dollar to weaken again, we need U.S. (economic) data to weaken — we believe it will.

Dominic Schnider, Head of Global FX and Commodities at UBS Wealth Management, stated that investors "have not yet seen how damaging (the trade war) will be."

Risk Warning and Disclaimer

Markets are risky, and investments should be made with caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk