“Buy The Dips!!!” (Eric Trump 2/21/25)
APRIL 8, 2025
CEO of Palantir announces sale of $1.1 billion of his stock (2/29/25).
In the two days April 3 and 4, shortly after the close of the quarter, the S&P 500 fell 4.8% and then 6.0%. This hardly compares to Black Monday October 19, 1987 when the S&P 500 fell almost 25% in one day after falling 10% over the previous week.
By the end of April 4, the S&P 500 was down 18% from its previous high, just a smidge short of the conventional -20% definition of a bear market. The Nasdaq 100 was down 22% and thus by conventional definition had entered a bear market.
On Monday, April 7, the S&P 500 tried four times but failed to break into positive territory. Tuesday morning, April 8 finally produced a move up but it soon faltered.
In both 1987 and 2025, the sudden plunges were exacerbated by momentum-based hedge funds and program trading “algo’s” which automatically sell after a specified decline or automatically buy after a specified rise. This formula buying is different from retail “dip buying” or retail “selling on strength.”
In this case, the formula and other selling was only partly counteracted by a massive wave of young retail investor “dip buying,” $4.7 billion on April 3 alone according to J.P. Morgan. Retail investors had previously ponied up $33 billion in March and lost 35% on their favorite stocks according to Goldman Sachs. Despite the losses, they still had more than 40% of their assets in stocks, a record according to the Federal Reserve Bank of St. Louis.
The future of the US market over the next few years is likely to be determined by the psychology of the young dip buyers. Anecdotally they seem at least as emotionally engaged as in 2000, when the first great bubble of this century was peaking. They will be aided by corporate share repurchase, which is currently on hold while earnings are reported.
Retail investors of all ages have historically done poorly by buying assets and funds that have risen sharply and selling those that have fallen sharply. Wall Street’s “dirty little secret” is that hedge funds are increasingly doing the same.
The April 3 and 4 downturn was universally attributed to the announcement of the Trump tariff program. This was partly true. Tariffs battles damage trust and economic prosperity ultimately depends on the kind of complex cooperation that is impossible without trust. The Trump administration is arguing in response that the U.S. has been too trusting and that cooperation will ultimately be restored.
At the same time, the tariff explanation is incomplete. Market prices reflect supply and demand. Supply and demand is in turn affected both by valuations (especially over the longer term) and by investor psychology (especially over the shorter term).
Recent high valuations, the highest in history, make the market vulnerable to a shift in investor psychology from any source. High prices, together with extreme market concentration, are an accident waiting to happen.
Part of the deterioration in investor psychology has been linked to Wall St. earnings expectations. These began the year at an average of 15.2% for 2025, far higher than 5.9% projected revenue growth, with earnings valued at record high multiples. Even before April, Wall St. earnings estimates for 2025 had been reduced by as much as three fourths.
The S&P 500 peaked on February 19. Especially after March 10, the market fell. By March 25, worry had driven market concentration to a new high, with 28% of the S&P 500 in only five stocks.
At the end of the year, I wrote about the magic thinking prevailing at the time: “All else being equal, it is a mathematical certainty that rising prices must reduce future returns. During manias, most investors either ignore the math or insist that nothing is like the past. There will be a bottomless cornucopia of profits guaranteed into the future, profits growth will far exceed revenue growth, and multiples of earnings will keep expanding to even higher levels.
“In 1983, both market earnings and market multiples were at record lows, which produced an explosive return thereafter. Today, we have the exact opposite, record high earnings, forecast to increase at record levels.”
I also pointed out that both Wall St. analysts and politicians either fail to understand or choose to disregard that unprecedented federal deficits bloat corporate earnings. The direct relationship between public spending and private profits was first pointed out by economist Michal Kalecki, who described it in his Kalecki Equation.
Keeping the US federal debt extremely short term, as Janet Yellen did to an unprecedented degree, despite the opportunity to lock in low yields, also hypes the economy and the stock market due to the additional liquidity supplied. This has left the Trump administration with a ton of short term treasury bills to roll over soon, notwithstanding the disincentive potentially created for foreign buyers by tariffs.
Before the recent fireworks at the end of March 31, the S&P 500 had fallen 5.0% for the quarter, the Nasdaq 100 a little further at 9.1%. By contrast, senior gold miners had risen 36.1% and gold bullion 19.3%. Nvidia fell 21.2% and Tesla 37.9% for the quarter. At quarter end, US stocks still represented over 70% of world markets, a record.
On April 4, gold, which had held up well on the 3rd, fell almost 3%. This is quite normal. Although gold provides a hedge against uncertainty, it is also the most liquid asset. Stock owners facing margin calls sell gold to meet the demands. In addition, gold needed to correct if it were to rise further. It would not be surprising for it to correct much more deeply after such gains.
While most eyes are currently fixed on the stock market, the credit markets have also been deteriorating. Credit spreads have widened. As Grant’s Interest Rate Observer has noted, some borrowers are using payment in kind provisions to add unpaid interest and principal back onto principal. Others are relying on the private credit bubble to add to leverage despite shaky earnings, presumably hoping to make failing companies the lender’s problem. Insurance companies (including annuity contracts) are among those put at risk by these practices.
WRITTEN BY:
HUNTER LEWIS | CHIEF INVESTMENT OFFICER
Hunter Lewis is Chief Investment Officer of Hunter Lewis LLC, as well as a co-founder and former CEO of global investment firm Cambridge Associates. Learn more about Hunter Lewis.