Clouds of Tariffs + Seasonal Slowdown, Wall Street "Smart Money" Accelerates Exit from US Stocks

Despite the S&P 500 index continuing to rise and approaching historic highs, Wall Street's "smart money" remains steadfast in its bearish stance.

We have learned that Goldman Sachs' latest report shows that hedge funds have been continuously reducing their exposure to US stocks over the past four weeks, with the scale of sales far exceeding any previous correction. Notably, just before earnings season begins for the technology, media, and telecommunications sectors, these funds are rapidly unwinding their positions in these areas – which were the main drivers of the market's rebound since April.

This cautious stance has allowed hedge funds to successfully avoid the selloff triggered by tariff worries in April. Although the S&P 500 index may have reached a new high in July, making it miss out on some profits, with concerns about trade wars and traditional seasonal slowdowns looming, these market participants' retreat is worth noting.

"Fund managers are still being very cautious because many potential risks remain unresolved," said Jonathan Caplis, CEO of PivotalPath, a research institution focused on hedge funds.

This sentiment is not limited to the investment world. The Federal Reserve left interest rates unchanged this week, with Chairman Powell once again emphasizing that decision-makers need more time to assess the impact of tariffs on inflation.

Precise Risk-Avoidance Strategy

In late March, we predicted that Trump would announce new tariffs, and hedge funds quickly reduced their stock exposure and increased their short positions. This strategy proved extremely prescient, especially for those funds that also added to global stocks (which outperformed US stocks) at the same time.

"Hedge funds avoided the pain of a market decline by reducing their leverage in advance," Caplis said. "As they didn't suffer any significant losses, they don't need to chase the market now."

In contrast to individual investors' enthusiasm, hedge funds are responding coldly to the market's surge. Scott Rubner, head of equity and derivatives strategy at Citadel Securities, noted that individual investors have continuously bought stocks for 23 consecutive trading days. Goldman Sachs' transaction department believes that unless there is a significant change in economic prospects or employment data, individual investors will not give up their buying enthusiasm.

Of course, hedge funds did miss out on this round of gains. The S&P 500 index has risen 27% since its low point in April and may set a new record for the longest monthly consecutive rise since September last year. This year, hedge funds have performed relatively well, with PivotalPath's diversified stock index showing an average return of 7.8% as of June, slightly better than the 28% return over the past half-year.

However, if seasonal patterns hold true, their strategy may bear fruit in the short term. August and September are often the two worst months of the year for performance, and with high valuations and the deadline for tariff policies looming, the S&P 500 index may face difficulties.

Data from UBS shows that if we look back to 1950, these two months have consistently performed poorly.

"In the first year of a presidential term, these two months are especially terrible," wrote Aaron Nordvik, head of macro and equity strategy at UBS. "If this rule continues to hold true, there may be strong gains at the end of the year, but before that, from around August 4th onwards, these two months will be exceptionally challenging."