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John Schlegel: Hi, welcome to Market Matters on J.P. Morgan's Making Sense. I'm John Schlegel, head of global positioning intelligence, which is part of the Data Assets and Alpha Group here at J.P. Morgan. And today I'm really pleased to be sitting down with Andrew Tyler who is head of our global market intelligence team. Drew, thanks for being here to discuss markets again.
Andrew Tyler: Oh, thanks for having me.
John Schlegel: So as we sit here, it's the morning of Monday, March 3rd, and the U.S. equities have had a bit of choppiness, a little bit of a sell off. We're approximately flat on the year-to-date basis, not a whole lot of movement, you know, when we look back for the last couple months, but underneath the surface it feels like quite a lot has changed. So you know, Drew, given we're only a few percent from all-time highs, what do you think are the key reasons for this recent drawdown and which ones do you think actually matter versus what's just noise?
Andrew Tyler: Absolutely. So I'd first start with the weakening of the macro data. And so this kind of starts with the flash PMIs we saw about 10 days ago or so, really kinda coming below expectations. But then really more than that, the uncertainty that we have within policies. And so this is both the trade policies that we're still seeing to kind of get adjudicated across the world but also more of your domestic policies too. And then that added to those two reasons I would also say valuation to a certain extent as well as positioning. And to add a little bit more color behind this, with the tariffs or really the tariff uncertainty, we're starting to see this behavior impact the real world vis-à-vis businesses pulling forward some of their demand as we saw kind of in recent macro data prints, which is also driving up inflation to a certain extent. But it's also that demand pull forward as businesses really just don't know what to expect. And from here it's really the uncertainty around CapEx or capital expenditures, like, how a business is going to spend its money to expand but also hiring decisions too. Looking at these other ladder points of, uh, valuation and positioning, positioning is certainly your domain, so let me, uh, not step on your toes there. But I think from a valuation perspective what you've really seen in tech is kind of maybe went a little too far too fast. And whether this is DeepSeek trying to broaden out this AI trend or just the absolute term's SMP's a little bit too high, it felt time for a bit of a pullback. And so I really kind of, like, point this question to you as well just to see what have you seen from a positioning standpoint over the last few weeks and how has that really changed?
John Schlegel: Sure. No, I think it's been an interesting one from the position dynamic given obviously the sell off has led to some amount of reduction in risk. And I think we see this most clearly amongst the retail investor, which was quite positive, very strongly post the DeepSeek news actually, but now starting to reverse some of that bullish flow. And then also the more systematic investors. So when we look at CTAs, we've seen risk come in quite dramatically within the U.S. equity space. And so I think those two are somewhat consistent with the pullback. There has been a little more hedging overall. We've seen hedge fund nets come down, especially in the last week. So overall we're seeing positioning fall and we're actually on a longer-term basis now slightly below the 10-year average, which is kind of one of the first times we've seen this happen since early August of last year. So the level of positioning has certainly come in. I think what's still not clear though is how much has really been more adjusting to the uncertainty that you mentioned. So a lot of uncertainty leads to perhaps less risk-taking behavior in the near-term versus what's actually been funds getting concerned enough that they are actually getting bearish, which could lead to a snapback if you get good macro data. So you know, I think we're still in this close to triggering maybe an attractive setup from the positioning standpoint, but not quite there yet given the lack of real capitulation in the flows. So, I mean, Drew, back to you a little bit on this. As you think about what could maybe resolve some of this uncertainty either positively or negatively, there does seem to be a lot of macro callous coming up in the next few weeks. So what do you think could matter the most as you look ahead in the next few weeks?
Andrew Tyler: Yeah, absolutely. And before I answer that question, I think it's worthwhile to kind of understand that for our listeners that in many cases what you're looking for is a point in time where you have macro data that is good and getting better 'cause that will also pull up expectations for earnings. And then typically when you have macro data that's bad and getting worse and you see those expectations move lower, that also negatively impacts stocks. So with that in mind, for this week alone, you actually have ISM data on today, Monday, again on Wednesday, but then it's really the non-foreign payrolls print on Friday that is the most important print this week. And the reason why I say this is the ISM numbers could be slightly mushy, but as long as people have jobs, the expectation is that we will spend as Americans and that's typically the behavior that we've seen. So I think that's the single most important data point we're looking for right now kinda given that we have reached the tail end of earnings. But even with the earnings, you still have a couple of major semiconductor companies yet to report this week and if both of those kind of beat expectations, you could really start to see the AI trade kinda come back a little bit and that would really help the broader tech complex.
John Schlegel: Also, I mean, maybe moving on from the very, very macro side, as you think about kind of which trades, which sectors could work, I know you've been generally bullish on TMT and cyclicals. Have your views around this changed given more of the uncertainty and how much of that is just kind of a wait and see for the time being before getting back into those themes versus how much is actually you wanna shift the portfolio a little bit more?
Andrew Tyler: Yeah, no, absolutely. And so what I would say is that with the, the advent of DeepSeek, you've seen this AI trade broaden and it's broadened outside the U.S. And so when you have, like, the China NPC this week, you might get a little bit more information that could actually draw more money into the China tech trade. So I think there is a wait and see to a certain extent, but when I think about U.S. tag, you mean, I think that a lot of the drawdowns that we've seen in some of the single names are extreme enough that they make pretty attractive entry points for people that are looking on a little bit longer-term basis than, like, let's call it a couple of weeks or maybe even a couple of months. So I think it's gonna take a little bit of time there. When we think about broader cyclicals, things like financials continue to attract money because this is a sector that for the most part is insulated from the tariffs. And I think that makes it unique in this time of round, that, so, like, you think about some of your more traditional defensives, healthcare, consumer staples, and utilities, well, utilities has been tied in the AI trade, so it doesn't really have the defensive properties we would normally exhibit. But then you start to think about some of your Mag Seven names, some of them have, let's call it operations and revenues that look like a bond. So I think there are some idiosyncratic plays within the Mag Seven that can be really fascinating.
John Schlegel: That's really interesting and I hear you on the financials bit. That's been one of the most popular trades for investors since really late last year when Trump's odds of winning the presidency started to tick higher. But, you know, as we've noted in multiple times in the past, we still think that looks pretty attractive from a medium-term standpoint given where positioning started from and sort of how much more could go from kind of the more longer-term complex. But if you think about those non-U.S. views that you just mentioned, are you really thinking that those have a lot more legs to go? Because, I mean, one of the topics that's been most asked to me about, has been how much have people repositioned into international equities? How much of that is coming at the expense of the U.S.? How much more could go into those markets? So, I mean, how much confidence do you have that those trends we've seen at the start of this year, especially in Europe as well as Chinese tech or Hong Kong equities, you know, how much more do you think they could go in the near-term or medium-term?
Andrew Tyler: That is the question of all questions. And so (laughs) let me think about how I wanna respond to this in the sense that well, look. I think if we have the positive macronated from the U.S. kind of this week, does that then kind of reboot tech? Because I think a lot of investors look at the U.S. as really where you wanna gain your growth. And when you start to see the tech sector fail to demonstrate that, then people are gonna start to very rationally move outside the U.S. for those opportunities. And so I don't think that I would be short any of the major regions that we've already spoken about, whether that's kind of China, Japan, most of developed Europe or even some of the parts of Latam. I just think that right now we are kind of held to basically having to watch what are the tariff headlines and we might have new headlines coming out tomorrow. If we're able to get past that kind of unscathed or let's say the tariffs come in below expectations, you're really setting the stage for areas that are the targets of tariff to continue to outperform. And I think that's probably the best trade right now.
John Schlegel: No, that's fascinating and I think it's one of those things that as we look at some of the positioning angle, the near-term has certainly been quite positive into some of the European an- and sort of Hong Kong stocks, mostly when we look at things like futures or systematic CTA positioning. But from a medium to longer-term standpoint, the sense is that we haven't really seen that move as much and that's, you know, what some of our longer-term data shows. So I do think depending on how these tariffs come out, if there is later than expected or sort of r- a bit more resolution around what the outcome could look like, you know, perhaps you continue to see that repositioning into those markets. Is there anything else, Drew, that you wanna kinda touch on in terms of near-term, medium-term catalysts and what investors should keep in mind?
Andrew Tyler: Yeah, absolutely. Th- one last final thing I would mention is the concept of seasonality. And so with seasonality, I would say that typically the first two weeks of March can be somewhat mushy versus if you look at March as the month and then combine this with April and May, that's actually the second-strongest three month period of the year behind October, November, December. So I guess then the question I have for you is, like, are you starting to see any seasonal flows that would match what we've seen historically and how does your view in the very tactical time period differ from, like, a little bit more kind of let's call it one to two months out?
John Schlegel: Yeah, thanks for that, Drew. I mean, I, I think in the very near term, some of the seasonal patterns do suggest, you know, a bit of this retail seasonality is playing out as we've seen it in the past, but it doesn't necessarily hold back the markets. I do think in the near-term, if we get a little bit of a positioning flush or if we get a re-acceleration of the macro data, to your point earlier of it's good when the data is good and getting better. And it's not great for equity investors when the data's bad and getting worse. I think the same thing sort of holds true from a positioning angle. But right now, the medium-term trend, so short-term, I think, get a little bit of positioning flush or clarity on the macro and we could go higher again and people could take a bit more risk. I think in the medium-term i.e. next couple quarters, the trend is a little bit still mixed. And I say this because the positioning trend has been high but getting lower versus if you look back to last year when the macro data was getting better, it was generally quite bullish and had been getting higher for the past couple of years. And so this could mean, you know, over the next couple quarters a greater odds of a more material sell off if the data actually turns. But I think still in the next couple of months the expectation would be equity markets hang in there, assuming the macro data doesn't actually deteriorate that quickly, positioning re-accelerates a little bit or stabilizes at this point. And then we'll have to see in a few months if that trend in the broader macro story is actually weakening and if clients need to kind of reposition a bit more to the downside or protection at that point in time. So maybe just to wrap up kind of what we discussed, Drew, at the moment, the macro data is a little bit challenging. You do see some reasons why we could say a little bit more cautious in the very near-term, but as you just kind of mentioned around the seasonal points, if the macro data holds up, you would be still bullish on markets over the next couple of months in the U.S. But I think one of the more interesting things that's been happening is this broadening out of the trade beyond just the AI, clear AI winners in the U.S., to a more global rally. And you think that has some legs, especially if we get some more clarity around tariffs that isn't that negative. And I think from a positioning side, this s- sort of matches well, which is in the near term we've seen some risk reduced, not enough to call a clear kind of you should buy the market based on positioning being reduced quickly. But we could see that happen if either we get a bit more of a flush or if the macro data this week comes a bit more positive and reignites some of that risk sentiment in the near term. With that, we'll wrap up and, Drew, thank you again for sitting with me and chatting.
Andrew Tyler: Oh, it was great seeing you, John.
John Schlegel: It's great being with you. And thank you also to our listeners for tuning into this bi-weekly podcast series from our group. If you have feedback or if you'd like to get in touch, please go to our website, jpmorgan.com/market-data-intelligence, where you can send us a message via the contact us form. And with that, we will close. Thank you.
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