From Bliss to Panic: What Just Happened to the Markets?

Market pullbacks are normal, but this one hit fast and hard. Let’s analyze why stocks just tumbled.

KEY TAKEAWAYS

• The S&P 500 dropped over 10% in just 13 trading sessions, officially entering correction territory.
• Momentum indicators and technicals flipped negative—the index is below the 200-day moving average, a major trend indicator.
• Investor sentiment flipped fast, largely due to policy uncertainty and Trump’s aggressive tariff stance, which has inflationary and growth-restricting effects.
• The Fed didn’t cause this downturn—instead, it’s been a combination of economic reality checks and policy fears.
• The underlying fundamentals remain strong, and AI is still booming. This pullback, while painful, may actually be healthy in the long run.

MY HOT TAKES

• The market’s post-election rally was too good to be true—reality finally caught up.
• The “Trump Put” has a strike price, but we don’t know where it is yet. Investors assumed he would protect the market, but tariffs prove otherwise.
• Tariffs aren’t just negotiation tactics anymore—they’re real, and they’re inflationary.
• Investors always forget that markets pull back. The past three years have conditioned them to expect nothing but up.
• NVIDIA still can’t make chips fast enough. AI isn’t dead—investors just needed a reason to panic.
• You can quote me: "The fundamental conditions that existed in late February still exist today! And finally, there is a Trump Put out there, we just haven’t found its strike price."

Correct me… if I’m wrong. Have you ever had a period where you didn’t sleep well for a number of days despite being overly tired from physical, mental, and emotional exhaustion? Sure, you have. But then it finally happens. You close your eyes only to open them what seems like minutes later and it is the next morning. Your first thought, is “finally, some rest,” and then you look at your clock and realize that you have slept late–bliss turns into stress, and this sets the tone and tempo for the rest of your day, possibly sending you back to the suck zone that you thought you finally escaped for those brief seconds earlier that day. I am sure that you already know where I am going with this.

If you closed your eyes on February 19th feeling pretty accomplished with your investment prowess, and opened them yesterday afternoon, you would probably have had a similar reversal of emotions described above. 😱 Way back in February, a little more than 3 short weeks ago, you might have been expecting to have another 2024 or 2023. You have probably deleted your memories of 2022, March 2020, 2018… 2015! I understand, it is a coping mechanism. 

So why would you have been feeling so confident on February 19th? Well, we just had a 4th all-time high close for this year alone. Earnings season was really solid. The sales growth of all US stocks was on par with last quarter (slightly higher) and earnings growth eclipsed last quarters. There were lots of great stories of growth potential and strength. The AI market seemed to be growing by the nanosecond (that’s faster than a millisecond 🤓). Sure, the President’s trade tactics seemed somewhat erratic, but he would not do anything to hurt the American economy. I mean, his campaign was centered around growth and how he would fix Biden-era inflation.

Well, as we now know in a little over 3 weeks, the S&P 500 has entered into a technical correction. Check out chart number 4 in my daily chartbook, then keep reading.

I build this chart every morning for myself (happy to share the R language code with you if you like). It tells us a lot. I am sure that your gaze has set on the right-hand side which shows the rather sharp drop with more and larger red candles than green. You may also note that the S&P 500 is below the blue line which is the 200-day simple moving average. While this seems simple, I can promise you that almost every single hotshot hedge fund manager uses this indicator in one way or another. It is a time-tested trend test. Closes below this line indicate a de-trended market. Some investors will simply not even buy stocks when markets are below this line, and some, more extreme ones may even choose to sell them (don’t do that–it doesn’t work).

Do you see the downward-sloping black and green lines in the top panel? Those are short and long-term momentum lines. Negative momentum is also something that most if not all hedgies watch closely. Why would you bet on a horse that is running in the wrong direction? On the bottom panel of the chart you can see exactly where long-term momentum went from positive to negative–where the horse turned around. 🏇That was just a few days after the Big index hit its last all-time high. And that blue line that is steeply negative is the trend of that first order derivative of prices. It is linear regression fit, and if you mentally reverse time, you can see that it has been, itself, steepening–it’s second order derivative. That means it is losing momentum, at an increasing rate. Not plotted on this chart is just how large the drawdown from February’s all-time high is. I will tell you. Yesterday’s close was -10.13% below February’s high close. That is considered a correction (10% decline and greater), and it only took 13 trading sessions to get there.

So, what happened? How did we get here from there? Did the Fed do something in the interim? No, the Fed was clearly in the “friend zone” prior to that. No one was expecting anything spectacular from the big Bank. 

I know, it must be because of DeepSeek. I can’t tell you how many times I have heard that. 😵‍💫 Chinese competition for market incumbents OpenAIs GPT-4, Google’s Gemini, Anthropic’s Claude, or Meta’s LLaMA2. Sorry, if you persist down that line of reasoning, you are about to underperform the market for the next several years. So, NO IT’S NOT because of the flawed logic that AI is done growing.

Let’s just get real and identify what it is that caused this predicament. Well first, if there were such a thing and the Unknowns Index, we would see it rise starting the Monday after the inauguration. Market’s hate unknowns, and the fake index’s rapid rise was enough to topple the positive momentum.

Next, there was a recent realization that the President was serious about blunt-force tariffs–they were not just bargaining chips. Tariffs are inflationary and anti-growth–it is fact, and there is no credible narrative to challenge that. That realization was a bit of an eye-opener, and I have to admit, I was surprised as well. You see, I too believed that there was a Trump Put out there. Many believed that there was no way that a purported, business-friendly President would allow the economy and the market to tank… for too long. Not only was that thesis debunked, but the President has appeared to go out of his way in the past two weeks to signal that he doesn’t care about the markets.

All that has been too much to handle. Consumer confidence has had some recent declines, personal spending surprisingly dipped recently, retail sales recently pulled back noticeably, and tariffs–yes tariffs are now officially… well, official. Everything from China is now 20% more expensive for US-based importers. Either they will suffer, or you will. Aluminum and steel are now 25% more expensive. AND a whole bunch of other stuff stands to get more expensive as well. Oh, and there are counter-tariffs. Sorry farmers, farm equipment manufacturers, fertilizer companies, all agri-businesses–remember 2018? All this can and will affect GDP negatively. How much? Enough to cause a recession? Well, as we learned recently, all this was enough to send the Fed’s GDPNow model, which is a real-time estimator of current quarter GDP, into the red. That’s right, negative. Two quarters of negative growth is the first condition of a technical recession. Is that enough to spook you? Indeed, it is, and that is the reason that the market has pulled back so sharply.

Here are a few things to consider, though. The pullback seems more extreme because the unjustified, post-election run-up was so extreme. If we removed that from the equation, this would not feel so nasty. It may even feel–I dare say–healthy. Markets pull back. It’s normal. I am not saying that it’s fun, but it is part of investing. Companies are still healthy! AI is not dead. NVIDIA still has a super long sales backlog–it can’t make chips fast enough to meet still-strong demand. Consumer confidence has been tested, but it is still holding in there. My friends, the fundamental conditions that existed in late February, still exist today! And finally, there is a Trump Put out there, we just haven’t found its strike price. Do a quick exercise for me. Close your eyes and think about your favorite portfolio companies. Do you think these will be higher or lower than here in 3 years? How about 5 or 10 years? Exactly! Now, I am not going to say we will not hit rough patches along the way, and we are certainly in one now. But if your goal is to create long-term growth and grow wealth, guess what? You are in luck, because this, like 2015, 2018, March 2020, and 2023 will pass and growth will follow. Stay patient, stay focused, try and relax.

YESTERDAY’S MARKETS

Stocks could simply not get a break yesterday because French wine tariffed at 200% is simply not good! PPI came in lower than expected, upsetting some traders who are still obsessed with Fed interest rate cuts.

NEXT UP

• University of Michigan Sentiment (March) may have slipped to 63.0 from 64.7. Watch this really carefully, this index slipped last month, and it is one of my favorite confidence indicators and you know how obsessed I am with consumer confidence.
• Next week we will get Retail Sales, Industrial Production, housing numbers, Leading Economic Index, and the FOMC MEETING. Don’t be the last one to find out; check back in on Monday to download your own weekly economic calendar.

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