Macro thread - Why is the market up/down?

[Paarslaars]

It's good that bonds are no longer a safe haven.

[Spekulatius]

If Monday rips, it will be a great opportunity to raise some cash and reduce risk in your portfolio, imo.

[Sweet]

15 minutes ago, Spekulatius said:

If Monday rips, it will be a great opportunity to raise some cash and reduce risk in your portfolio, imo.

It looked like it was going to rip, now it looks like the opposite with Lutnick and now apparently rare mineral export ban from China.

[Spekulatius]

32 minutes ago, Sweet said:

It looked like it was going to rip, now it looks like the opposite with Lutnick and now apparently rare mineral export ban from China.

The rare earth mineral ban was in place for a couple of days now. The market has ignored it so far, imo wrongly so.

 

In a few month, we are going to have major shortages in many high tech goods, if this export controls are not reversed.

[Spooky]

8 hours ago, Blake Hampton said:

 

There was extreme volatility in the bond market and interest rate derivatives, and it was causing a lot of liquidations. Basis trades blowing up, etc. People were really panicking. It's was essentially the same thing that happened during March of 2020.

 

Read this: America’s financial system came close to the brink - The Economist

 

If you can't read it, subscribe to The Economist; it's certainly one of the best financial publications there is. You're doing yourself a huge disservice if you're not reading it.

 

I wish some / more hedge funds blew up. We were starting to get some good deals with all the forced selling.

 

[whatstheofficerproblem]

I recently came across this very interesting 1Q17 letter from Horizon Kinetics. The original cannot be found anymore, so here is a link from ValueWalk: https://www.valuewalk.com/pe-not-pe-turn-90-22-three-easy-steps/

 

If anyone here as the original PDF, please share.

 

I found the methodology used by Horizon Kinetics very interesting, given that 2017 was a long time ago, I decided to run the same experiment once again. I used python and yfinance module to scrape the market caps as well as earnings for each ticker in the index and here are the results.

 

Given the recent volatility and broader sell-off thanks to de-grossing, the mkt caps have taken a big hit. The combined mkt cap of the QQQ was ~$24.7T and the combined earnings on this was ~$931.9B, so the P/E has actually gotten better since 2017 and is now at ~26.5x earnings. Note that there was also a ton of rebal in the last 8 years.

 

I also did the same with the Russell 2000, and here is where things get interesting. The combined mkt cap on the Russell 2000 was ~$2.7T but the earnings were just a meager $1.88B, so that brings the P/E of Russell to 1442.7x which is ridiculous. Goes to show just how many companies are bleeding money.

 

Mark Hulbert said in 2017 that when Vincent Deluard did what HK did with the Russell 2000, the P/E was 78.7x. Russell also did rebalance, but looks like the discrepancy has gotten worse. While the QQQ has on paper become cheaper, Russell has become 18x more expensive.

 

What do you guys think of this? Let me know if you want to try this with another index, as long as yfinance has the data I should be able to get the numbers.

[sleepydragon]

Hedge fund blewing up, impo, is not going to cause big market panic. Nowaday hedge funds industry are very sophisticated — blew ups are frequent and counter parties know how to limit their risks. The hedge funds also tend to be sophisticated and unwind quickly. 
 

it’s always the economy that matters in the end. If the trarrif wars keep going..

[Dalal.Holdings]

The drop in USD is like another layer of Tariffs that makes imports more expensive

[Buckeye]

A weaker dollar also makes US exports cheaper for the importing countries correct? And if correct, then the fact that the US imports much more than it exports would/could be a net negative for the US? 

Edited April 21, 2025 by Buckeye

[mattee2264]

Yeah weaker dollar is probably part of the plan as it makes US exports more price competitive. Of course also makes imports more expensive so adds to inflationary pressures. 

[Sweet]

I know nobody will actually know the answer to this question.  But is the stock market pricing in tariffs at the moment, or tariffs and a recession?

 

I’ve been thinking the market is pricing in tariffs and there is another shoe to drop if we have a recession.  But maybe both are happening simultaneously 

[Paarslaars]

My guess would be that a certain decrease in earnings is priced in due to tariffs. However companies are resilient and might still surprise the market...

[Blake Hampton]

The market is currently selling at 4.4x book, with an average 25-year ROE of 13.3%. I’d make a strong bet that both corporate taxes and interest expenses will be significantly higher, on average, over the next 25 years than they were over the last. Given that, the ROE is likely overstated.

 

It’s not pricing in anything, it's a bubble.

 

 

Edited April 22, 2025 by Blake Hampton

[Blake Hampton]

People buying stocks at 100x earnings will say it's normal.

[gfp]

Just now, Blake Hampton said:

People buying stocks at 100x earnings will say it's normal.

 

what about the nerds around here buying cheap stocks?  Are we OK?  Is it still OK to buy undervalued securities in a "bubble" ?  

[Blake Hampton]

Just now, gfp said:

what about the nerds around here buying cheap stocks?  Are we OK?  Is it still OK to buy undervalued securities in a "bubble" ?  

It's probably better than owning cash.

 

Edited April 22, 2025 by Blake Hampton

[Spooky]

1 minute ago, Blake Hampton said:

The market is currently selling at 4.4x book, with an average 25-year ROE of 13.3%. I’d make a strong bet that both corporate taxes and interest expenses will be significantly higher, on average, over the next 25 years than they were over the last. Given that, the ROE is likely overstated.

 

It’s not pricing in anything, it's a bubble.

 

 

I have a hard time believing the corporate tax rate will be significantly higher in the future. The reality is that there is a global race to the bottom to attract company headquarters to different countries so there is an incentive to lower corporate tax rates.

 

Also, on interest rates, there is a 5000 year trend in declining interest rates in play. There is just so much capital in the world now, all looking for a home to invest. 

[Blake Hampton]

28 minutes ago, Spooky said:

I have a hard time believing the corporate tax rate will be significantly higher in the future. The reality is that there is a global race to the bottom to attract company headquarters to different countries so there is an incentive to lower corporate tax rates.

 

Also, on interest rates, there is a 5000 year trend in declining interest rates in play. There is just so much capital in the world now, all looking for a home to invest. 

 

1.) The deficit is on track to surpass well over $2 trillion this year. Our country must raise taxes and cut spending if they ever hope to get control of this, and corporate taxes are a large part of that. It's simply unsustainable and our country hasn't had to pay for it yet.

 

2.) Financing deficits through debt is only a more convoluted way of printing money. When you finance a fiscal deficit through issuance of Treasury bills, you're effectively printing a cash equivalent to finance the overconsumption of your country. The way that we ultimately pay for these deficits will be inflation, and inflation and interest rates are tied together in a huge way. Inflation, in effect, can become a discount rate for bond securities. This is a big reason why interest rates actually rise during inflationary periods. Why would you lay out your cash for a security yielding 5%, when you can take that same money and go buy goods and services increasing at a rate of 10%? Now the Fed can decide to cap yields, but if the Treasury doesn't get Fiscal policy in order, this simply results in more inflation.

 

Edited April 22, 2025 by Blake Hampton

[Blake Hampton]

I would say that both the president and Congress don't care about responsible fiscal policy at all, so maybe taxes and spending don't go anywhere. This still has its own set of consequences.

 

"Money doesn't grow on trees."

[Blake Hampton]

Now, we have a president who is destroying what little faith the world still had in us, even though we rely on that same world to absorb our debt.

 

How exciting.

[Gregmal]

Weird how not a single “news source” has the correct headline. “Market recovers after falling for no reason yesterday”….cuz two days of sensationalized headlines targeting both the bull and bear crowds are just too enticing….

[sleepydragon]

7 minutes ago, Gregmal said:

Weird how not a single “news source” has the correct headline. “Market recovers after falling for no reason yesterday”….cuz two days of sensationalized headlines targeting both the bull and bear crowds are just too enticing….

or it might has more to do with schools are closed on friday and Monday. Dads are back to computer trading stocks today

[Gregmal]

Yea everyone’s got their thing. Media can be reliably consistent stepping up to feed the emotional children their breakfast. Best to just let it be.

[Spooky]

1 hour ago, Blake Hampton said:

 

1.) The deficit is on track to surpass well over $2 trillion this year. Our country must raise taxes and cut spending if they ever hope to get control of this, and corporate taxes are a large part of that. It's simply unsustainable and our country hasn't had to pay for it yet.

 

2.) Financing deficits through debt is only a more convoluted way of printing money. When you finance a fiscal deficit through issuance of Treasury bills, you're effectively printing a cash equivalent to finance the overconsumption of your country. The way that we ultimately pay for these deficits will be inflation, and inflation and interest rates are tied together in a huge way. Inflation, in effect, can become a discount rate for bond securities. This is a big reason why interest rates actually rise during inflationary periods. Why would you lay out your cash for a security yielding 5%, when you can take that same money and go buy goods and services increasing at a rate of 10%? Now the Fed can decide to cap yields, but if the Treasury doesn't get Fiscal policy in order, this simply results in more inflation.

 

 

On point #1, I agree there needs to either be higher taxes or lower spending (likely a combination of both). But raising corporate tax rates is not going to be the way to do it. Just take a look at what happened in the US when the corporate tax rate was much higher - companies moving their headquarters to Canada / other jurisdictions for a lower tax burden. This is why Biden was pushing for some kind of global minimum corporate tax. Capital and corporations can generally freely move around the globe for the most favourable jurisdiction.

 

On point #2, I agree that if America First is continued it could lead to structurally higher interest rates in the US. However, that is just one possible scenario. There are a lot of deflationary forces out in the world. If America First puts the global economy or US economy into a recession, or even a depression, then rates could be much lower. Also, look at what happened to S&P interest expenses when the Fed sharply raised rates from almost zero - most large companies had structured their debt in a way where they were pretty well insulated from rising interest expenses. The general trend in interest rates has been a downward trajectory over time.

[Gregmal]

4 minutes ago, Spooky said:

Also, look at what happened to S&P interest expenses when the Fed sharply raised rates from almost zero - most large companies had structured their debt in a way where they were pretty well insulated from rising interest expenses. The general trend in interest rates has been a downward trajectory over time.

Ha! I totally forgot about this! Remember all the bs from the first level bears about increased borrowing costs crushing earnings? Then it turned out the real impact of higher interest rates was near negligible for most companies. Why it hardly ever pays to panic or just run with the simplest narrative of the day.