The Greed & Fear Tango: The Markets in April 2025!

    I started the month on a trip to Latin America, just as the tariff story hit my newsfeed and the market reacted with a sell off that knocked more than $9 trillion in market cap for global equities in the next two days. The month was off to a bad start, and tariffs remained the lead story for much of the month, contributing to both its biggest down days (with stories of trade war escalation) and to the biggest up days (with news of relief from the fight). To add to the volatility, there was talk midway through the month of replacing Jerome Powell as the Fed Chair, and assorted news adding to uncertainty about the direction of the economy. An observer reading just the news stories and asked to guess what the market did during the month would probably have bet on stocks falling steeply, but he or she would have lost that bet, because markets managed to surprise us all again, ending the month almost where they began.

Equities: Storm Clouds gather (and dissipate)!

    It would be an understatement to describe equity markets in April 2025 as volatile, with the equity indices going through stomach wrenching up and down movements intraday and across days, as investors struggled to price in a world of tariffs, trade wars and policy uncertainty.

The journey that the indices went through during the course of the month has been extraordinary. Each of the indices lost close to 10%  in the first two days of the month, went deeper into the hole in the second week of the month, but by the end of the month, they had each found their way back to almost where they started the month at, with the S&P 500, NASDAQ and the MSCI world index all within 1% of their start-of-the-month levels.

    As I noted in my post right after the first couple of days of this month, where I framed the market crisis around tariffs, the indices sometimes obscure markets shifts that are occurring under the surface, and that looking at all publicly traded stocks on an aggregated basis provides a more complete picture. I will start by looking at the regional breakdown of what the month delivered in terms of change in market cap, in both dollar and percentage terms:

The crisis may have been birthed in the United States, but as has been the case with market crises in this century, it has spread across the world, with disparate impacts. There are truly no standouts in either direction, with China being the worst performing region, in terms of percentage change in dollar value, down 3.69%, and India and Latin America tied for best performing, up 3.57%.  These are dollar returns, and since the US dollar came under selling pressure during the course of the month, the local currency returns were worse, especially in markets, like the EU, where the Euro gained about 5% in the courser of the month.

    At the start of the month, as has been the case for much of the last decade, the focus was on technology, partly because of its large weight in overall equity value at the start of 2025, and partly because of the punishment meted out to tech stocks during the first quarter of the year.  Focusing just on US equities, technology companies, which accounted for 29.4% of the overall market capitalization of all US companies at the start of 2025, lost $2.34 trillion (about 13.19%) in market capitalization in the first quarter of 2025. In the first few days of April, that trend continued as technology initially led the rout, losing an additional $1.78 trillion, but by the end of April, tech had made at least a partial comeback:

As you can see, technology ended the month as the second best performing sector, up 1.67% for the month, and in spite of the handwringing about their poor performance, their share of the market cap pie has barely changed after the first four months of 2025. While the first quarter continues to weigh the sector down, as was the case in 2022, the obituaries written for technology investing may have been premature.

    Staying in the weeds, I also looked at the push and pull of growth versus value, by breaking US equities down into deciles based on earnings to price ratios and assessing their performance leading into April and in April 2025 alone:

As you can see, while there is no clearly discernible pattern across deciles of US stocks based upon earnings to price ratios, breaking down US stocks into a top and bottom half, based upon the ratio, yields the conclusion that while high PE stocks had a bad start to the year, losing 10.9% of their value in the first quarter, they made a comeback in April, up 1.74% for the year,  while low PE stocks were down 2.22% for the month. That pattern of a reversal in April 2025 of trends that had been forming in the first quarter of 2025 shows upon in other proxies for the value versus growth tussle:

• Looking at companies broken down by market capitalization into deciles, you find that larger cap companies outperformed small cap stocks during April, 
• Breaking down stocks based on dividends, dividend paying stocks and companies buying back stock underperformed non-cash returning stocks, indicating that there was no flight to safety in April.

    Finally, I classified companies based upon their stock price performance in 2024 to see if what we are seeing in 2025 is just a correction of overreach in 2024. After all, if that is the case, we should see the stocks that have performed the best in 2024 be the ones that have taken the most punishment this year:

As you can see, momentum returned in force in April, with the best performing stocks in 2024 up 0.76% during the month, while the worst performing stocks of 2024 were down 5.31% for the month. In fact, the year-to-date numbers for 2025 indicate that momentum remains in the driver's seat, extending a long period of outperformance. 

    In sum, the market stresses in April 2025 seems to have pushed the market back into its 2024 ways, after a first quarter that promised reversal, as technology, growth and momentum all made a comeback in the last three weeks of April. The performance of the Mag Seven, which represent a combination of all three forces (large, high growth and technology), in April provides a tangible measure of this shift:

The Mag Seven have had a bad year to date, losing $2.6 trillion in market capitalization, but they made a comeback from the depths to finish April at about the same market cap that they had at the start of the month, recovering almost all of the $1.55 trillion that they lost in the first week of the month.

    In short, not only did equities recover in the last three weeks of April 2025, but there seems have been a shift in sentiment back the forces that have borne markets upwards for the last few years, with technology, growth and momentum returning as market drivers. Of course, three weeks is a short time, but this is a trend worth watching for the rest of this year.

The Rest of the Market: Swirling Winds?

    As equities careened through April 2025 between panic and delirium, the other asset classes were surprisingly staid, at least on the surface, starting with the US treasuries. Unlike other crises, where US treasuries saws funds flow in, pushing down yields and pushing up prices, treasury rates remained relatively stable through much of April:

Not only did rates remain almost unchanged across the maturity spectrum, but they were stable on a week-to-week basis. The yield curve, downward sloping for much of the last two years,  is now u-shaped, with 3-month rates and 2-year rates higher than 5-year rates, before reverting back to higher longer term (10-year and 30-year rates). Coming from the camp that we read too much economic significance into yield curve slopes and dynamics, I am reluctant to draw big conclusions, but some of this can be attributed to expectations of higher inflation in the near term. There is another force at play in this crisis that has not been as visible in past ones, at least in the US treasury market, and that is concerns about the trustworthiness of the US government Though this is still an early indicator, that can be seen in the sovereign CDS market, where investors pay for insurance against default risk, and where the US CDS spread has risen in April:

The sovereign CDS spread for the US has risen about 38% during the course of this month, and the interesting part is that much of that rise happened in the last three weeks of the month, and during the first week, when equities were collapsing. The rise in perceptions of US default risk is more likely to have been precipitated by the threat to fire Jerome Powell, and by extension to the independence of the Fed as an institution. While that threat was withdrawn, the sovereign CDS spread has stayed high, and it will be worth watching whether it will come back down or whether some permanent damage has been done to US treasuries as a safe haven. As some of you who follow my thinking on riskfree rates may know, I argue that the riskfree rate in a currency is not necessarily the government bond rate in that currency, and that the default spread has to netted out from the government bond rate two get to a riskfree rate, if the sovereign in question is not viewed as default-free. Building on that principle, I may soon have to revisit my practice of using the US treasury rate as the riskfree rate in US dollars and net out a default spread for the US from that rate to get to a riskfree rate.

    During April 2025, commodity prices were also on the move, and in the graph below, I look at oil prices as well as an overall commodity index during the month: 

In the first third of the month, oil prices, in particular, and commodity prices, in general, joined equities, as they moved down, but in the last part of the month, they delinked, and stayed down, even as stock prices bounced back up. To the extent that the demand for commodities is driven by real economic growth, that would suggest that at least in the near term, the tariffs that precipitated the crisis will slow down global economies and reduce demand for commodities. 

    The concerns about central banking independence that triggered the surge in the US sovereign CDS spread also played out in currency markets, where the US dollar, already weakened in the first quarter, continued its decline in April. In the graph below, I look at the dollar-euro exchange rate and an index measuring the strength of the dollar against multiples currencies.

The dollar continued its decline in April, down about 3% against a broad basket of currencies, and more than 5% against the Euro. 

    Finally, I looked at two other investment classes - gold and bitcoin - for the same reasons that I brought them into the discussion at the start of April. They are collectibles, i.e., investments that investors are drawn to during crisis periods or when they lose faith in paper currencies and governments:

Download data

Gold had a good month in April, up about 5.3%, and hitting $3.500 towards the end of the month, but Bitcoin did even better rising almost 14.12% during the course of the month. That said, the fact that financial asset markets (equity and bond) recovered over the second part of the month made this a month where collectibles were not put to their test as crisis investments, and the rise in both can be attributed more to the loss of trust that has driven  the sovereign CDS spread up and the US dollar down.

Risk and Co-movement

    Early in April, I argued that the one number that would track the balance between greed and fear in markets would be the price of risk in markets, and I resolved to estimate that price every day, through April, for both equity and bond markets. With equity markets, the price of risk is the equity risk premium, and at least  in my estimation process, it is a forward-looking number determined by the level of stock prices and expected cash flows. In the table below, I report on my estimates of the equity risk premium for the S&P 500 every trading day in April, in conjunction with the VIX, and equity volatility index that should be correlated:

Download day-to-day data

After rising above 5% in the first third of the month, the equity risk premium decreased in fits and starts over the rest of the month to end at almost the same value (4.58%) as at the start of the month (4.59%). In parallel, the VIX soared in the first few days of the month to peak at 52.33 on April 8, and then decreased over the rest of the month to a level (24.70) close to where it was at the start of the month (22.28).

    In the bond market, the price of risk takes the form of default spreads, and these spreads followed a similar path to the equity risk measures:

Download data

The default spread on high yield bonds surged, rising by more than 1% between the start of the month and April 7, before declining, but unlike the equity risk measures, the bond default spreads did end the month at levels higher than at the start, indicating at least at this point that near term concerns about the economy and the ensuing default risk have not subsided.

    As a final exercise, I looked at the correlation in price changes across investment classes - stocks, treasuries, investment-grade and high-yield corporate bonds, commodities, gold and bitcoin:

Download data

With the caveat that this is just 22 trading days in one month, it does yield some preliminary results about co-movements. First, stock and treasury bond prices moved together much of the month, not something that you would expect during a crisis, when bond prices gain as stock prices fall. Second, while both gold and bitcoin prices moved with stocks, gold prices movements were more closely tied to stock price movements, at least during the month. In sum, the movement across asset markets affirms our conclusion from looking at company-level data that this was more a month of asset reprising than panic selling or buying.

    In sum, if I were to summarize what the data is pointing me towards, here are the general conclusions that I would draw, albeit with a small sample:

1. The market movements through much of the month were less driven by panic and more by investors trying to reprice companies to reflect a world with more trade barriers and tariffs and political turmoil.
2. While equities, in the aggregate, ended the month roughly where they started the month, a shift in sentiment seemed to occur in the last three weeks of the month, as technology, growth and momentum, three forces that seemed to be in retreat in the first quarter of 2025, made a come back.
3. With US treasuries, there was little movement on the rates, but under the surface, there were shifts  that could be tectonic in the long term. There was clearly a drop in trust in the US government and its institutions, which played out in rising sovereign CDS spreads and a declining dollar, and trust once lost can be difficult to gain back.
4. The investment classes that are most vulnerable to the real economy, i.e.. commodities and higher yield corporate bonds, were down for the month, indicating a slowing down of global economic growth.

In the coming months, we will see whether the last three weeks of April were an aberration or the start of something bigger.

Lessons Learned

    Every market meltdown carries pain to investors, but that pain is often spread unevenly across these investors, with the variation driven as much as by what they held coming into the crisis, as it is by how they behaved in response to the sell off. I am not sure April 2025 falls into the crisis column, but it did feel like one early in the month, and as I look back at the month, I come back to three market characteristics that stood out.

1. Market resilience: In the last five years, markets have repeatedly not only got the big trends right, but they have also shown far more resilience than any expert group. I would wager that if you had given a group of macro economists or market strategists just the news stories that came out during the course of the month and asked them to guess how they would play out in market reaction, almost none of them would have guessed the actual outcome (of flat markets). At the time of COVID, I argued that one reason for market resilience is that market influence has become diffuse, with social media and alternative sources of information supplementing and often replacing the traditional influencers - the financial press, media and investment talking heads, and market movements are less driven by large portfolio managers exhibiting herd behavior and more by disparate groups of traders, with different motives, models and patterns. 
2. Market power: A key reason for the turnaround in markets during April was the administration's decision to walk back, reverse or delay actions that the market reacted to strongly and negatively. The "liberation day" tariffs that triggered the initial sell off have largely been put on hold or suspended, and the talk about replacing the Fed Chair was walked back quickly the week after it was made. In short, an administration that has been impervious to Wall Street journal editorials, warnings from economists and counter threats from other governments has been willing to bend to market selling pressure.
3. Market unpredictability: As markets rose and fell during the course of the month, the debate about the value added by active investing kicked into full gear. I heard quite a few advocates of active investing argue that it was during times like this (volatility and crisis) that the "sage counsel" and "timely decisions" of wealth or fund managers would protect investors on the downside. I would suggest the opposite, and am willing to bet that the extent of damage that April did to investor portfolios was directly proportional to how much time they spent watching CNBC and listening to (or reading) what market experts told them to do.

On a personal note, I stuck to my resolution early in the crisis to use it to stay true to my investment philosophy. As someone who stinks at market timing, I made no attempt to buy and sell the market through the month, perhaps leaving a great deal of money on the table, or more likely, saving myself just as much from getting the timing wrong. In the middle of April, I talked about three strands of  contrarian investing, and in that post, I put myself  in the opportunistic contrarian camp. I did use the mid-month sell off to add BYD, a stock that I like, to my portfolio, when its price dipped below my limit price ($80). Palantir and Mercado Libre (my two other limit buys) came close but not low enough to break through my limits, but I am willing to wait, revisiting my valuations along the way.

    I do have some portfolio maintenance work that I need to do in the coming weeks, especially on the six of the seven Mag Seven stocks that remain in my portfolio (Tesla is out of my portfolio and Nvidia is at a quarter of my original holding). As these companies report their first quarter earnings, I plan to revisit my valuations from last year, when in the face of mild to moderate over valuation, I chose to maintain my holdings. As in prior years, I will post my assessments of value and my hold/sell judgments, but that has to wait because I do have more immediate priorities. First, as a teacher, with the semester end approaching, I have a stack of grading that has to get done. Second, as a father, I am looking forward to my daughter having her first child next week, and the market and my portfolio take a distant second place to getting acquainted with my new granddaughter.

YouTube Video

My Posts (from April 2025)

1. Anatomy of a Market Crisis: Tariffs, Markets and the Economy!
2. Buy the Dip: The Draws and Dangers of Contrarian Investing

Data Links

1. Day-to-day numbers (ERP, default spreads and asset prices)

Anatomy of a Market Crisis: Tariffs, Markets and the Economy!

I was boarding a plane for a trip to Latin America late in the evening last Wednesday (April 2), and as is my practice, I was checking the score on the Yankee game, when I read the tariff news announcement. Coming after a few days where the market seemed to have found its bearings (at least partially), it was clear from the initial reactions across the world that the breadth and the magnitude of the tariffs had caught most by surprise, and that a market markdown was coming. Not surprisingly, the markets opened down on Thursday and spent the next two days in that mode, with US equity indices declining almost 10% by close of trading on Friday. Luckily for me, I was too busy on both Thursday and Friday with speaking events, since as the speaker, I did not have the luxury (or the pain) of checking markets all day long. In my second venue, which was Buenos Aires, I quipped that while Argentina was trying its best to make its way back from chaos towards stability, the rest of the world was looking a lot more like Argentina, in terms of uncertainty. On Saturday, on a long flight back to New York, I wrestled with the confusion, denial and panic that come with a market meltdown, and tried to make sense of what had happened, and more importantly of what is coming. That thinking is still a work-in-progress but as in prior crises, I find that putting even unfinished thoughts down on paper (or in a post) is healthy, and perhaps a critical component to finding your way back to serenity.

The Tariffs and Markets

    Since talk of tariffs has filled the airwaves for most of this year, you may wonder why markets reacted so strongly to the announcement on Wednesday. One reason might have been that investors and businesses were not expecting the tariff hit to be as wide and as deep as they turned out to be.     

Note that while Canada and Mexico were not on the Wednesday list of tariff targets that was released on Wednesday, they have been targeted separately, and that the remaining countries that do not show up on this map (Russia and North Korea, for instance) are under sanctions that prevent them from trading in the first place. 

    Another reason for the market reaction was that the basis for the tariff estimates, which have now been widely shared, are not easily fixable, since they are not based on tariffs imposed by other countries, but on the magnitude of the trade deficit of the United States with these countries. Thus, any country with which the US runs a significant trade deficit faces a large tariff, and smaller countries are more exposed than larger ones since the trade deficit is computed on a percentage basis, from exports and imports related to that country.  Thus, the easy out, where other countries offer to reduce or even remove their tariffs may have no or little effect on the tariffs, to the extent that the trade deficit may have little to do with tariffs.      

Equities

    The extent of the market hit can be seen by looking at the major US equity indices, the Dow, the S&P 500 and the NASDAQ, all of which shed significant portions of their value on Thursday and Friday:

Looking beyond these indices and across the globe, the negative reaction has been global, as can be seen in the returns to equity across sub-regions, with all returns denominated in US dollars:

The worst hit regions of the world is Small Asia, which is Asia not counting India, China and Japan, which saw equity values in the aggregate decline by 12.61% in the last week. US equities had the biggest decline in dollar value terms, losing $5.3 trillion in value last week, a 9.24% decline in value from the Friday close on March 28, 2025. China and India have held up the best in the last week, perhaps because both countries have large enough domestic markets to sustain them through a trade war. It is also a factory that with time differences, these markets both closed before the Friday beatdown on Wall Street unfolded, and the open on Monday may give a better indication of the true reaction. Breaking down just US equities, by sector, we can see the damage across sectors:

The technology sector lost the most in value last week, both in dollar terms, shedding almost $1.8 trillion (and 11.6%) in equity value, and consumer staples and utilities held up the best, dropping 2.30% and 4.40% respectively. In percentage terms, energy stocks have lost the most in value, with market capitalizations dropping by 14.2%, dragged down by declining oil prices.

    Staying with US equities, and breaking down companies, based upon their market capitalizations coming into 2025, we can again see write downs in equity value across the spectrum from last week's sell off:

As you can see, it looks like there is little to distinguish across the market cap spectrum, as the pain was widely distributed across the market cap classes, with small and large companies losing roughly the same percent of value. To the extent that market crisis usually cause a flight to safety, I looked at US stocks, broken down by decile into earnings yield (Earnings to price ratios), over the last week:

The lowest earnings to price ratio (highest PE) stocks, in the aggregate, lost 10.91% of their market capitalization last week, compared to the 8.08% decline in market cap at the highest earnings to price (lowest PE ratio) companies, providing some basis for the flight to safety hypothesis. Staying with the safety theme, I looked at US companies, broken down by debt burden (measured as debt to EBITDA):

On this dimension, the numbers actually push against the flight to safety hypothesis, since the companies with the least debt performed worse than those with the most debt. Finally, I looked at whether dividend paying and cash returning companies were better protected in the sell off, by looking at dividend paying (buying back stock) companies versus non-dividend paying (not buying back stock) companies:

While dividend paying stocks did drop by less than non-dividend paying stocks, companies buying back stock underperformed those that did not buy back stock in 2024. 

      If you came into last week, believing that stocks were over priced, you would expect the correction to be worse at companies that have been bid up the most, and to test this, I classified US stocks based upon percentage stock price performance in 2024:

While the worst performers from last year came into the week down only 1.83% through March 28, whereas the best performers from 2024 were down 6.46% over the same period, there was little to distinguish between the two groups last week. 

    Finally, I looked at the Mag Seven stocks, since they have, in large part, carried US equities for much of the last two years;

Collectively, the Mag Seven came into last last week, already down 14.79% for the year (2025), but their losses last week, which massive in dollar value terms ($1.55 trillion) were close in percentage terms to the losses in the rest of the market.

Other Markets

    As equity markets reacted to the tariff announcement, other markets followed. US treasury rates, which had entered the week down from the start of the year, continued to decline during the course of the week:

While the 3-month treasury bill rate remained fairly close to what it was at the start of the week, the rates at the longer end, from 2-year to 30-year all saw drops during the week, perhaps reflecting a search for safety on the part of investors. The drops, at least so far, have been modest and much smaller than what you would expect from a market sell off, where US equities dropped by $5.3 trillion.

    Looking past financial markets, I focused on three diverse markets - the oil market as a stand-in for commodity markets overall, the gold market, representing the time-tested collectible, and Bitcoin, which is perhaps the millennial version of gold:

Oil prices dropped last week, especially as financial asset markets melted down on Thursday and Friday, while both gold and bitcoin held their own last week. For bitcoin advocates, that is good news, since in other market crises since its creation, it has behaved more like risky stock than a collectible. Of course, it I still early in this crisis, and the true tests will come in the next few weeks.  

Summing up

    In sum, the data seems to point more to a mark down in equity values than to panic selling, at least based upon the small sample of two days from last week. There was undoubtedly some panic selling on Friday, but the flight to safety, whether it be in moving into treasuries or high dividend paying stocks, was muted.  

 The Crisis Cycle

    Each crisis is unique both in its origins and in how it plays out, but there is still value in looking across crises, to see how they unfold, what causes them to crest, and how and why they recede. In this section, I will present a crisis cycle, which almost every crisis works its way through, with big differences in how quickly, and with how much damage. The crisis cycle starts with a trigger event, which can be economic, political or financial, though there are often smaller events ahead of is occurrence that point to its coming. The immediate effect is in markets, where investors respond with the only instrument the they control, which is the prices they pay for assets, which they mark down to reflect at least their initial response to the crisis. In the language of risk, they are demanding higher prices for risk, translating into higher risk premiums. In conjunction, they often move their money to safer assets, with treasuries and collectibles historically benefiting from the fund flows. In the days and weeks that follow, there are aftershocks from the trigger event, both on the news and the market fronts, and while these aftershocks can sometimes be positive for markets, the net effect is usually negative. The effects find their way into the real economy, as consumers and businesses pull back, causing an economic slowdown or a recession, with negative effects on earnings and cash flows, at least in the near term. In the long term, the trigger event can change the economic dynamics, causing a resetting of real growth and inflation expectations, which then feed back into markets;

To illustrate, consider the 2008 banking crisis, where the Lehman collapse over the weekend before September 15 triggered a sell off in the stock market that caused equities to drop by 28% between September 12 and December 31, 2008, and triggered a steep recession, causing unemployment to hit double digits in 2009. The earnings for S&P 500 companies took a 40% hit in 2008, and long term, neither the economy nor earnings recovered back to pre-crisis levels until 2012.

During that crisis, I started a practice of estimating equity risk premiums by day, reflecting my belief that it is day-to-day movements in the price of risk that cause equity markets to move as much as they do in a crisis:

Spreadsheet with raw data

Equity risk premiums which started the crisis at around 4% peaked at almost 8% on November 21, 2008, before ending the year at 6.43%, well above the levels at the start of 2008. Those equity risk premiums did not get back to pre-2008 levels until almost 15 years later.

    Moving to 2020 and looking at the COVID crisis, the trigger event was a news story out of Italy about COVID cases in the country that could not be traced to either China or cruise ships, shattering the delusion that the pandemic would be contained to those settings. In the weeks after, the S&P 500 shed 33% of its value before bottoming out on March 23, 2020, and treasury rates plunged to historic lows, hitting 0.76% on that day. The key difference from 2008 was that the damage to the economy and earnings was mostly short term, and by the end of the year, both (economy and earnings) were on the mend, helped undoubtedly by multi-trillion dollar government support and central banking activism:

As in 2008, I computed equity risk premiums by day all through 2020, and the graph below tells the story:

Spreadsheet with raw data

As you can see, the equity risk premium which started at 4.4% on February 14, 2020, peaked a few weeks later at 7.75% on March 23, 2020, and as with the economy and earnings, it was back down to pre-crisis levels by September 2020.

The Perils of Post Mortems

    Each crisis gives rise to postmortems, where investors, regulators and researchers pore over the data, often emerging with conclusions that extrapolate too much from what happened.

• For investors: The lesson that many investors get out of looking at past crises is that markets come back from even the worst meltdowns, and that contrarian investing with a long time horizon always works. While that may be comforting, this lesson ignores the reality that the fact that a catastrophe did not occur in the crisis in question does not imply that the probability of it occurring was always zero. Markets assess risks in real time.
• For regulators: To the extent that crises expose the weakest seams in markets and businesses, regulators often come in with fixes for those seams, mostly by dealing with the symptoms, rather than the causes. After the 2008 crisis, the conclusions were that the problems was banks behaving badly and ratings agencies that were not doing their job, both merited judgments, but the question of risk incentives that had led them on their risk taking misadventures were largely left untouched.
• For researchers: With the benefit of hindsight, regulators weave stories about crises that are built around their own priors, by selectively picking up data items that support them. Thus, behavioral economists find every crisis to be an example of bubbles bursting and corrections for irrational investing, and efficient market theorists use the same crisis as an illustration of the magic of markets working.

It is worth remembering that each crisis is a sample size of one, and since each crises is different, aggregating or averaging across them can be difficult to do. Thus, the danger is that we try to learn too much from past crises rather than too little.

The Tariff Crisis?

    I don't believe that it is premature to put the tariff news and reaction into the crisis category. It has the potential to change the global economic order, and a market reaction is merited. It is, however, early in the process, since we are just past the trigger event (tariff announcement) and the initial market reaction, with lots of unknowns facing us down the road:

There are clearly stages of this crisis that have played out, but based on what we know now, here is how I see them:

1. After shocks: The tariff story will have after shocks, with both negatives (other countries imposing their own tariffs, and the US responding) and positives (a pause in tariffs, countries dropping tariffs). Those after shocks will create more market volatility, and if history is any guide, there is more downside than upside in the near term. In addition, the market volatility can feed itself, as levered investors are forced to close out positions and fund flows to markets reflect investor concerns and uncertainty. If you add on top of that the possibility that global investors may decide to reduce their US equity holdings, that reallocation will have price effects.
2. Real economy (near term): In the near term, the real economy will slow down, with the plus being that while tariff-related price increases are coming, a cooling down in the economy will dampen inflation. The likelihood of a recession has spiked in the days since the tariff announcement, and while we will have to wait for the numbers on real growth and unemployment to come in, it does look likely that real growth will be impacted negatively. The steep declines in commodity prices suggests that investors see an economic slowdown on the horizon. As
3. Real economy (long term): Global economic growth will slow, and the US, as the world’s largest economy, will slow with it.. There are other dynamics at play including a restructuring of old economic and political alliances (Is there a point to having a G7 meeting?) and a new more challenging environment for global companies that have spent the last few decades building supply chains that stretch across the globe, and selling to consumers all over.

It is worth noting that if we measure winning by not the size of the pie (the size of the entire economy) but who gets what slice of that economy, it is possible that tariffs could reapportion the pie, with capital (equity markets) getting a smaller slice, and workers getting a larger slice,. In fact, much of this administration's defense of the tariff has been on this front, and time will tell whether that works out to be the case.

    In the two days after the announcement, stock prices have dropped and the price of risk has risen, as investors reassess the economy and markets:

The implied equity risk premium has risen from 4.57% on April 2  to 5.08% by the close of trading on Friday. The road ahead of us is long, but I plan to continue to compute these implied equity risk premiums every day for as long as I believe we are in crisis-mode, and I will keep these updated numbers on my webpage. As stocks have been revalued with higher prices of risk, that same uncertainty is playing out in the corporate bond market, where corporate default spreads widened on Thursday (April 3) and Friday (April 4):

As with the equity risk premiums, the price of risk in the bond market had already risen between the start of 2025 and March 28, 2025, but they surged last week, with the lowest ratings showing the biggest surges. With treasury rates, equity risk premiums and default spreads all on the move it may be time for companies and investors to be reassessing their costs of equity and capital. 

What now?

    If you have stayed with me so far on this long and rambling discourse, you are probably looking for my views on how this crisis will unfold, and how investors should respond now. I am afraid that dishing out investment advice is not my cup of tea, but I will try to explain how I plan to deal with what's coming, with the caveat that what I do may not work for you

A (Personal) Postscript 

    In the midst of every market meltdown, you will see three groups of experts emerge. The first will be the "I told you so" group, eager to tell you that this is the big one, the threat that they have spent a decade or more warning you about. They will of course not let on that if you had followed their advice from inception, you would have been invested in cash for the last decade, and even with a market crash, you would not be made hold again. The second will include "knee jerk contrarians", arguing that stock markets always come back, and that every market dip is a buying opportunity, an extraordinarily lazy philosophy that gets the rewards (none) that its deserves. The third will be the "indecisives", who will present every side of the argument, conclude that there is too much uncertainty right now to either buy or sell, but to wait until the uncertainty passes. There are elements of truth in all three arguments, but they all have blind spots.

    In the midst of a crisis, the market becomes a pricing game, where perception gets the better of reality, momentum overwhelms fundamentals and day-to-day movements cannot be rationalized. Anyone who tells you that their crystal balls, data or charts can predict what's coming is lying or delusional, and there is no one right response to this (or any other) crisis. It will depend on:

1. Cash needs and time horizon: If you are or will soon be in need of cash, to pay for health care, buy a home or pay tuition, and you are invested in equities, you should take the cash out now. Waiting for a better time to do so, when the clock is ticking is the equivalent of paying Russian Roulette and just as dangerous. Conversely, if you do not need the cash and are patient, you have the flexibility of waiting, though having a longer time horizon does not necessarily mean that you should wait to act.
2. Macro views: The effects on markets and the real economy will depend on how you see the tariffs playing out, with the outcomes ranging from a no-holds-barred trade war (with tariffs and counter tariffs) to a partial trade war (with some countries capitulating and others fighting) to a complete clearing of the air (where the tariff threat is scaled down or put on the back burner). While you may be inclined to turn this over to macro economists, this is less about economics and more about game theory, where an expert poker player will be better positioned to forecast what will happen than an economic think tank.
3. Investment philosophy: I have long argued (and teach a class to that effect) that every investor needs an investment philosophy, attuned to his or her personal make up. That philosophy starts with a set of beliefs about how markets make mistakes and corrects them, and manifests in strategies designed to take advantage of those mistakes. 

My investment philosophy starts with the belief that markets, for the most part, do a remarkable job in aggregating and reflecting crowd consensus, but that they sometimes make big  mistakes that take long periods to correct, especially in periods and portions of the market where there is uncertainty.  I am terrible at gauging market mood and momentum, but feel that I have an edge (albeit a small one) in assessing individual companies, though that may be my delusion. My response to this crisis (or any other) will follow this script:

1. Daily ERP: As in prior crises, I will continue to monitor the equity risk premiums, treasury rates and the expected return on stocks every day until I feel comfortable enough to let go. Note that this process lasted for months after the 2008 and 2020 crises, but as earnings updates for the S&P 500 reflect tariffs, my confidence in my assessments will increase. (As mentioned earlier, you will find these daily updates at this link)
2. Revalue companies in my portfolio: While I was comfortable with the companies in my portfolio on March 28, viewing them as under valued or at least not over valued enough to merit a sell, the tariffs may have an significant effect on their values, and I plan to revalue them in batches, starting with my big tech holdings (the Mag Five, since I did sell Tesla and most of my Nvidia holdings) and working through the rest. 
3. Buy value: I have drawn a contrast between great companies and great investments, with the former characterized by large moats, great management and strong earnings power, and the latter by being priced too low. There are companies that I believe are great companies, but are priced so highly by the market that they are sub-standard investments and I choose not to invest in them. During a crisis, where investors often sell without discrimination, there companies can become buys, and I have to be ready to buy at the right price. Since buying in the face of a market meltdown can require fortitude that I may not have, I have been scouring my list of great companies, revaluing them with the tariff effects built in, and putting buys at limit prices below those values. In the last week, both BYD, a company that I said that I liked, a few weeks ago in my post on globalization and disruption, and Mercado Libre, a Latin American powerhouse, that has the disruptive potential of an Amazon combined with a fintech enterprise, have moved from being significantly overvalued to within shouting distance of the limit prices I have on them. 
4. Go back to living: I certainly don't see much gain watching the market hour-to-hour and day-to-day, since its doings are out of my control and anything that I do in response is more likely to do harm than good. Instead, I plan on living my life, enjoying life's small pleasures, like a Yankee win or taking my dog for a walk, to big ones, like celebrating my granddaughter's birthday in a couple of days. 

I hope that you find your own path back to serenity in the face of this market volatility, and that whatever you end up doing with your portfolio allows you to pass the sleep test, where you don't lie awake at night thinking about your portfolio (up or down). 

YouTube Video

Data Links

1. Equity risk premiums by day, Banking Crisis in 2008
2. Equity risk premiums by day, COVID Crisis in 2020
3. Equity risk premiums by day, Tariff Crisis in 2025 (ongoing)

A Viral Market Update XIV: A Wrap on the COVID market, premature or not!

Over the last eight months, I have written a series of posts on the market and how it has adapted and adjusted to COVID. The very first of these posts, on February 26, 2020, was about two weeks into the meltdown and it is indicative of how little we knew about the virus then, and what effects it would have on the economy and the market. More than seven months later, there is still much that we still do not know about COVID, as it continues to wreak havoc on global economies and businesses. In this post, I intend to wrap up this series with a final post, reviewing how value has been reallocated across companies during the months, and providing an updated valuation of the S&P 500. Given that much of Europe is going into lockdown, and that there is no vaccine in sight, this may seem premature, but I have a feeling that there will be other uncertainties that will vie for market attention over the coming weeks, especially as the US election results play out in legal and legislative arenas. 

A Market Overview

For those of you who have read my prior posts on COVID's market effects, I will follow a familiar script. I will start by noting that this crisis has played out in markets in three acts, captured in the graph below where I look at the S&P 500 and the NASDAQ, since the start of this year:

The year began auspiciously for US equities, as stocks built on positive performance in 2019 (when it was up more than 30%) and continued to rise. In fact, on February 14, US equities were are at all time highs, when news of the virus encroaching into Europe and then rapidly expanding across the world caused stocks to go into a tailspin that lasted just over five weeks. On March 23, 2020, amidst talk of doomsday for stocks, momentum shifted, with some credit to the Fed, and stocks went on a run that extended through the end of August, recovering almost all of the ground lost during the meltdown. In September and October, stocks were choppy with more bad days than good, as investors recalibrated. While the graph is US-centric, this was a global crisis, and equities around the global moved through the same three phases, as you can see in the table below, where I look at selected equity indices from around the world:

Download data

Note that the pattern  is very similar, across indices, with steep drops in the first phase (2/14-3/20), followed by steep increases in the following months (3/20-9/1) before settling down in the last two months (9/1-11/1). As equities went on a turbulent ride, other asset classes were also affected, with US treasuries benefiting from a flight to safety in the first five weeks:

Download data

US treasury yields dropped across all maturity classes between February 14 and March 20, with short term rates dropping close to zero and 10-year T.Bond rates dropping fro 1.7% to 0.7%. I know it is fashionable now to attribute all things related to interest rates to the Fed's actions, but the bulk of the decline in treasury rates occurred before the Fed finally acted in mid-March, and it is surprising how little movement there has been in treasury rates in the months since. Though treasury yields have stayed at their mid-March levels, the rise and fall of the fear factor in the equity markets also played out in the corporate bonds, in the form of movements in corporate default spreads:

Download data

When stocks were melting down between February 14 and March 20, corporate bond spreads were also widening dramatically, but those spreads have fallen back almost to pre-crisis levels for the higher ratings, and mostly recovered even for the lower ratings. 

Looking at oil and copper, two economically sensitive commodities, you see reflections of the turbulence that affected equities and corporate bond markets:

Download data

Both oil and copper prices dropped significantly between February 14 and March 20, with oil showing a much larger decline (down more than 50%) than copper (about 15%), but both commodities have recovered, with copper now up almost 17% from pre-crisis levels. Oil, in spite of its comeback in the last few months, is still down more than 30% from pre-crisis levels. Finally, I look at gold and bitcoin, an odd pair, but both touted by their advocates as crisis assets:

Download data

While bitcoin is now up more than gold over the period, gold has performed better as a crisis asset, holding its own when equities were melting down between February 14 and March 20. In contrast, the crypto currencies (Bitcoin and Ethereum) have behaved like very risky equities, going down more than equities, when stocks were going down, and rising more, when they rose.

Equity Markets: A Wealth Transfer

The quick recovery in equity markets has led some to believe that the market has ignored the crisis, but that is not true. While equity values have recovered globally, there has been a significant shift in value across regions, sectors and company types. While I have talked about this value reallocation in previous posts, I will update the numbers and provide a summary of what the data is showing as of November 1. First, this crisis has played out very differently in different parts of the world, as you can see below, where I break down the market capitalizations of all publicly traded companies, by region, on February 14, 2020 and on November 1, 2020, with a table showing the percentage changes over the period:

Download data

The markets that are showing the most residual damage are Africa, Eastern Europe & Russia and Latin America. While the easy explanation is that they are all emerging markets, note that Asia has emerged not just unscathed, but as one of the best performing regions of the world. Among the developed markets, the UK is the worst performer, perhaps dragged down by the continued uncertainty of how Brexit will play out. A better explanation would be that these are regions heavily dependent on natural resource and infrastructure businesses, and as we will see in the next section, those have been adversely affected by this crisis. In addition, since these returns are in US dollars, currency movements add to the effect, with depreciating (appreciating) currencies, against the dollar, worsening (improving) returns. Building on the theme that damage has varied across sections, I break down aggregate market cap by sectors, on February 14 and November 20, in the graph below (also with percent changes over the period:

Download data

Again, the shift in value is clear and decisive, with consumer discretionary, technology and health care gaining at the expense of energy, real estate, utilities and financials. Put simply, capital light businesses have gained at the expense of capital intensive ones, and breaking down sectors into finer industry detail, emphasizes this shift, with the ten best and worst performing industries below:

Download data

In an earlier post, I connected this value shift across industries to corporate life cycles, noting that younger, higher growth companies have gained value at the expense of older, more mature businesses, as can be seen in the tables below, where I break down the value change across companies, first by age, and then by expected revenue growth rate, into deciles:

Download corporate age data & revenue growth data

The youngest companies have gained value over this crisis, whereas the oldest companies have lost value, and high growth companies have benefited at the expense of low growth firms. As this shift has occurred, it is not surprising that the stocks most favored by value investors (low PE/PBV, high dividends) have underperformed the stocks that are most favored by growth investors. I capture this in the table below, where I first look at value changes across companies, first classified across PE ratios and then across dividend yields:

Download PE decile data & Dividend decile data

Value investors have also warned us over the last decade about two trends in corporate behavior, an increase in debt loads at some companies and a surge in stock buybacks. To evaluate whether those warnings were justified, I looked at companies classified by debt load (net debt to EBITDA) into deciles and computed value changes between February 14 and November 1.

Download data

On this front, I think that the message is clear that the more indebted a company, the more exposed it was to damage during this crisis. On the buyback front, the results are a little murkier. In the graph below, I look at value changes for four groups of companies, (1) those that returned no cash at all in 2019 (no dividends or buybacks), (2) those that paid only dividends, (3) those that returned cash in the form of buybacks and (4) those that did both:

There is a muddled message in this graph. While companies that returned no cash to their shareholders in 2019 fared better overall than companies that returned cash (either in dividends or in buybacks) in 2019, companies that returned cash only in the form of buybacks recovered faster and more completely the companies that paid only dividends. Companies that both paid dividends and bought back stock did worst of all. If flexibility is key to surviving a crisis, it is possible that this crisis will make companies more reluctant to return cash, in general, and when they do, it is also more likely that you will see that cash returned in the form of buybacks than dividends, since the former are easily retracted but the latter are sticky.

Finally, no post on US equities is complete without a mention of the FANGAM stocks, a topic that I focused on in my last post. Updating the numbers through November 1, here is how these six companies have performed over the crisis, relative to the rest of the market:

Download data

As you can see, the FANGAM stocks have added $1.25 trillion in aggregate market cap since February 14, while all other US equities have shed $1.32 trillion over that period. If the market has almost fully recovered from its early swoon, the credit has to go almost entirely to these six companies.

The Resilient Risk Capital Thesis

The best way to summarize how this crisis has affected companies is to summarize the value transfer from what would be consider "risk on" categories (young, high growth, high PE, low or no dividends and high debt) to "risk off" categories (old, low growth, low PE, high dividends and low debt), looking at the top and bottom deciles of each grouping:

Note that in almost every category, other than debt, the "risk on" group gained value at the expense of the "risk off" group. One explanation that I offered in my post from a  few weeks ago was that, unlike prior crises, risk capital (defined as capital invested in the highest risk assets, such as venture capital and investments in below investment grade bonds) has stayed in the game, as can be seen in the behavior of VC fund flows and issuances of high yield bonds (updated to include the third quarter of 2020):

In fact, it is this resilience of risk capital that explains why the equity risk premium for the S&P 500, which soared in the first five weeks of this crisis, has reverted back to pre-crisis levels:

Download data

Put simply, markets, for better or worse, seem to be sending the message that the fear factor of the crisis has passed, though earnings and cash flows will need to be tweaked.

Market Assessment: Predictive Mechanism or Animal Spirits

As markets have risen over the last few months, there has been a fair amount of hand wringing about animal spirits and irrational exuberance driving markets higher. Some of this concern has come from the clear disconnect between stocks going up and economic malaise, but I noted that this is neither unusual nor unexpected, using this graph of stock returns and real GDP growth, by quarter:

Download data

Looking at the quarterly data over the last 60 years, there has been little to no relationship between stock returns in a quarter and the GDP change in that quarter, and if there is one, it is mildly negative, i.e., stocks are  slightly more likely to go up (down) in a quarter when GDP is down (up). While that may surprise some people, it is entirely understandable, when you recognize that stock markets are predictive mechanisms, and that is borne out by the data, with stock returns becoming positively correlated with GDP growth in future quarters. Note that while the correlation increases as you look three or four quarters ahead, it flattens out at about 0.26 indicating that markets are noisy predictors; they are wrong as often as they are right, but given a choice between trusting markets and going with market gurus, I will take the former every single time.

There is a debate to be had about whether markets have over adjusted to the possibility of a vaccine and the economy reopening, and to address that question, I decided to value the S&P 500 again; I did value it on June 1, 2020 and found it to be close to fairly valued. I revisited my assumptions, updating my estimates of earnings for the index in the near years (2020, 2021 and 2022), where the bulk of the damage from this crisis will be done.

Note that in the intervening five months, since my last valuation, analysts tracking the index have become more optimistic about earnings in 2020 and 2021. The resulting valuation reflects these improved estimates:

Download spreadsheet

Based upon my inputs, I arrive at a value for the index of just over 3100, which would make stocks mildly over valued. I also followed up with a simulation of this valuation, based upon distributions for my key inputs, and the results are below:

Download spreadsheet with simulation results

The simulation reinforces the findings in the base case valuation. You could make a case that stocks are over valued, and that case will be built on the premise that the economic damage from this crisis will be much greater and long lasting that analysts believe. However, if your argument is that markets have gone crazy and that nothing explains stock prices, you may want to evaluate that view, and consider at least the possibility that your world view (about how the economy will recover and the virus will play out) is wildly at odds with the market consensus. That leaves open the unpleasant possibility that it is you that is being irrational and wrong, not the market.

Crisis as Crucible: Lessons learned, unlearned and relearned

Every crisis is a crucible, exposing what we don't know and putting our faith to the test. This one has been no different, and while I will not tell you that I have enjoyed it, I have learned some lessons from it.

• Respect markets, even if you disagree with them: Markets are not all knowing and they are definitely not efficient, but they are extraordinary platforms for conveying a consensus view of the future. While you and I may disagree with the market view, and markets can be wrong, it behooves us all to at least try and understand the message that it delivers.
• Time to move on: For many managers and investors, the COVID crisis is a reminder, sometimes in painful terms, that we are now well into the 21st century and continuing to use tools, techniques and metrics that were developed and tested on 20th century data is a recipe for disaster. That was the underlying message in my posts on value investing from last month.
• Importance of Flexibility: If you look across what companies that have done well during this crisis share in common, it is flexibility, with companies that can adapt quickly to new circumstances improving their odds of winning. In the same vein, it seems self defeating for companies to borrow too much or lock themselves into paying large dividends, since both reduce their capacity to respond quickly to changed circumstances.

All in all, it has been an interesting roller coaster ride over these last few months, and I am glad that you were able to join me for at least some of the ride. It is definitely not over, but I have a feeling it is time for me to move on. There are other attractions at this fair!

YouTube Video

Data

1. Market data (November 1, 2020)
2. Regional breakdown - Market Changes (November 1, 2020)
3. Country breakdown - Market Changes (November 1, 2020)
4. Sector breakdown - Market Changes (November 1, 2020)
5. Industry breakdown - Market Changes (November 1, 2020)
6. PE breakdown - Market Changes (November 1, 2020)
7. PBV breakdown - Market Changes (November 1, 2020)
8. Dividend Yield breakdown - Market Changes (November 1, 2020)
9. Cash Return breakdown - Market Changes (November 1, 2020)
10. Age breakdown - Market Changes (November 1, 2020)
11. Revenue Growth breakdown - Market Changes (November 1, 2020)
12. Debt load breakdown - Market Changes (November 1, 2020)

Spreadsheets

1. Valuation of the S&P 500 on November 1, 2020
2. S&P 500 simulation results

Viral Market Update Posts

1. A Viral Market Meltdown: Fear or Fundamentals?
2. A Viral Market Meltdown II: Pricing or Valuing? Investing or Trading?
3. A Viral Market Meltdown III: Clues in the Market Debris
4. A Viral Market Meltdown IV: Investing for a post-virus Economy
5. A Viral Market Meltdown V: Back to Basics
6. A Viral Market Meltdown VI: The Price of Risk
7. A Viral Market Update VII: Market Multiples
8. A Viral Market Update VIII: Value vs Growth, Active vs Passive, Small Cap vs Large!
9. A Viral Market Update IX: A Do-it-Yourself S&P 500 Valuation
10. A Viral Market Update X: A Corporate Life Cycle Perspective
11. A Viral Market Update XI: The Flexibility Premium
12. A Viral Market Update XII: The Resilience of Private Risk Capital
13. A Viral Market Update XIII: The Strong (FANGAM) get Stronger!
14. A Viral Market Update XIV: It's a wrap, premature or not!