by Jack Fischer.
To be or not to be in a recession? That is the question.
Investors continue to debate whether the widely accepted technical definition of “recession” applies in our current economic environment. It has been generally accepted that a recession is signaled when U.S. gross domestic product declines in two consecutive quarters. U.S. GDP dropped by an unexpected 0.9% annualized rate in the second quarter, following a 1.6% decrease in quarter one.
It is important to note these annual numbers take into account last year’s significant post-COVID 19 growth spike. So, these annualized figures have abnormal factors baked into them, meaning it may still take time to assess the true long-term growth of our economy. Federal Reserve Chair Jerome Powell said last week:
“I do not think the U.S. is currently in a recession and the reason is there are too many areas of the economy that are performing too well…This is a very strong labor market…it doesn’t make sense that the economy would be in a recession with this kind of thing happening.”
Powell is not necessarily wrong about the current labor market. In today’s release from the U.S. Bureau of Labor Statistics, total nonfarm payroll employment increased in July by 528,000, moving the unemployment rate down to 3.5%. The release states that both total nonfarm employment totals and the unemployment rate have returned to February 2020 pre-pandemic levels. On the flip side, the U.S. economy still has 5.9 million people looking for a job (versus 5.0 million in February 2020), with a labor force participation rate of 62.1% (versus 63.4% in February 2020). Both job openings (-605,000) and job hires (-133,000) also fell in June from May.
While some policymakers may not believe we are currently in a recession, what is the fund data telling us? One Lipper classification that we can look at to get a pulse of market positioning is the Lipper Dedicated Short-Bias Funds. This classification consists of funds that employ portfolio strategies that consistently create a “net short” exposure to the overall market. This also includes short-only funds. Excluding the Lipper commodities classifications, Lipper Dedicated Short-Bias Funds (+8.77%) have outperformed all equity classifications in year-to-date through August 4 performance aside from Natural Resources Funds (+24.42%), Energy MLP Funds (+17.21%), and Alternative Managed Futures Funds (+11.62%). For reference, the average of all U.S. diversified equity funds returned a negative 14.20% year to date.
In terms of flows, Lipper Dedicated Short-Bias have recorded 11 weeks of inflows in 12, and seven straight. This last fund-flows week the classification attracted $1.0 billion of new capital. Five of the top 26 largest weekly inflows of all time for the classification occurred during 2022.
Lipper Dedicated Short-Bias Funds are coming off their largest monthly intake (+$3.2 billion) since April of 2020 (+$4.8 billion)—the largest monthly intake was April 2009 (+$6.7 billion). The classification observed its largest calendar year inflow during 2009 (+$20.7 billion). At the current pace, Dedicated Short-Bias Funds will surpass 2020 for the second largest annual inflow total. The top three year-to-date flow attractors from a fund management company perspective are ProShares (+$6.5 billion), Direxion (+$1.4 billion), and Federated Hermes (+$214 million).
As demand for these funds grows, the supply is slowly increasing as well. In 2020 we only saw one new fund launch within this Lipper classification, followed by six during 2021. So far through July, there have been nine new funds created—six of which were launched by AXS Investments during Q2.
The debate can continue whether or not we are in a recession, but what we can see is that there is both growing demand and supply for exposure betting against the overall market.
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