The battle between retail traders and hedge funds is unlikely to cause a major setback for markets, according to JPMorgan Chase & Co.
Major drawdowns have usually occurred when there’s a worse outlook for growth, as well as signs of overvaluation beyond price-earnings ratios and credit spreads, JPMorgan strategists led by John Normand wrote in a note Friday. Few markets show signs of extraordinary price momentum or excessive investor leverage, he said.
“The retail versus hedge fund conflict unfolding currently should be much less severe than the roughly 10% drops that have been occurring almost annually for the past two decades,” Normand wrote. “Our bubble tracker based on extreme price momentum, valuations and investor leverage isn’t flashing red at the asset class level, even if it might at the security level.”
Investors inspired by discussions on r/wallstreetbets have piled into stocks like GameStop Corp., seeking to squeeze out short positions held by hedge funds. The volatility unnerved investors last week, but global stocks rallied Monday as some of those concerns receded.
“No one should dismiss the combination of decentralized finance and rising retail influence that can drive markets,” Normand said. “But it seems a stretch to think that this issue is the pin prick that deflates a host of bubbles blown by quantitative easing programs.”
This article was provided by Bloomberg News.