Next Week Could Be Rough
Garbage is still popular... 'Bubble celebrities'... Don't buy every dip... Rescued by the megacaps... Next week could be rough... Buckle up...
The stock market is back...
Sure, it was awful last month, when markets plunged, headlines screeched, and talking heads fretted aloud.
The S&P 500 Index fell 12% from April 2 to April 8, mostly as a result of President Donald Trump's numerous announcements regarding U.S. import duties (tariffs) on... well... every big, important U.S. trading partner. These included Canada, Mexico, China, and many other Asian, European, and Latin American countries.
But now...?
The index finished the month down just 0.76%. April's early volatility and losses were nearly completely erased by an epic late-month rally. After starting the month at around 22, the CBOE Volatility Index ("VIX") spiked as high as 52 by April 8, but finished the month just below 25.
The Wall Street Journal reported on Wednesday...
Both the Dow and the S&P 500 have climbed for seven straight sessions, with the S&P 500 posting its largest percentage gain over that length of time since November 2020.
Remember November 2020. Back then, folks were buying expensive stocks, pushing them ever higher and just a few months away from the totally unhinged moment when every piece of absolute garbage hit its mega-bubble peak in early 2021: cannabis, special-purpose acquisition companies ("SPACs"), "clean energy," meme stocks...
You name it, every sad, desperate fool in the market was buying it. All the trash peaked in early 2021. It took until later in the year for the big indexes to peak before heading south in the 2022 bear market.
Last year, they did it again – with even worse garbage...
In a recent MarketWatch opinion piece, hedge-fund-trader-turned-social-psychologist Peter Atwater said folks are buying "Kinder eggs loaded with explosives." He didn't stop there...
They're financial turduckens, as it were, in which leverage, derivatives and overengineered cleverness have been stuffed one inside the other. They're Russian nesting dolls of risk.
Atwater warns the purveyors of these products of the inevitable backlash when these Kinder eggs, turduckens, and Russian dolls explode.
He adds that "advocates for capitalism should be most concerned"...
Today's cast of characters makes many prior bubble celebrities look like saints. Moreover, the next comeuppance won't be the crowd's first rodeo to come to an unfortunate end. Many already lost money in the housing crisis and the dot-com bubble burst before it. If capitalism was intended to richly reward investors, they didn't see it. Worse, they were punished by it. Thanks to FOMO, they bought in at the top and rode the ensuing elevator drop to the bottom.
Atwater is talking about leveraged exchange-traded funds ("ETFs") that buy a single stock. The most popular ones cover bitcoin proxy Strategy (MSTR) and electric-car maker Tesla (TSLA). But the same applies to any ETF with 2X, 3X, or even higher numbers in its name, which magnify the rise (or fall) of a stock. Atwater also says that political betting markets are similarly toxic.
Investors ate these things up last year, the same way they ate up all those garbage stocks in late 2020 and early 2021. Morningstar reports that assets in leveraged ETFs soared 51% to $134 billion in the 12 months ended January 31, 2025.
And now it's coming back to bite them...
Even before the Trump tariff tantrum, the leveraged bets were going south in a hurry.
The Wall Street Journal reported on March 20 that leveraged ETFs have plunged, "with some losing over 80% in just three months." Sadly, it also reported that "investors continue to buy the dip in these funds, highlighting the allure of high-risk, high-reward investments" at the heart of Atwater's concerns.
A fund that applies 2X leverage to Tesla shares has fallen as much as 83% since its December 17 all-time high and is still trading more than 70% below it today. A 2X Strategy ETF recently traded as much as 90% below its November peak and trades more than 75% below it today. And a 2X Super Micro Computer fund's shares peaked the day after it went public last August, then promptly plunged and now trades more than 90% below its peak.
There are a bunch of other examples, but you get the picture. Folks loaded up on garbage, then doubled down and bought the dips... And now they're screwed.
Clearly, not every dip should be bought...
As I noted in the current issue of The Ferris Report, investors dove in on the day after Trump's April 2 tariff announcement. According to MarketWatch...
Individuals made $4.7 billion worth of net equity purchases on April 3, meaning [the] value of shares they bought outpaced the amount they sold by $4.7 billion. This is the highest daily inflow over the past decade, according to data from J.P. Morgan.
But as the Wall Street Journal reported a week later...
By one measure, it has been the worst year for the "buy the dip" strategy in almost a century. Investors who have stepped in to buy shares on sale have instead been stuck with bigger losses. The S&P 500 has dropped 1.3% on average this year in the week after a one-day loss of at least 1%, according to Dow Jones Market Data. That would be the biggest such decline on record, in data going back to the 1920s.
As I wrote in The Ferris Report...
In other words, investors bought the dip with abandon at the worst time for buying dips in 100 years.
Overall, the stock market doesn't tend to be moved by a relatively small group of funds or stocks. Few of the new levered funds have billion-dollar market caps. The 2x TSLA fund seems to be the biggest, at around $4 billion.
But the big boys can certainly push the market around. As we've often noted over the past year or so, the largest-cap mega stocks – most notably the Magnificent Seven – get the lion's share of credit for keeping markets buoyant. This week was no exception...
Two Mag 7 companies helped lift stocks after hours Wednesday...
Microsoft (MSFT) turned in a blowout earnings report, with revenues up 13% over the same quarter last year and operating earnings 6% above Wall Street forecasts. The company's Azure cloud-computing unit grew revenues by 35%, compared with analysts' 31% growth expectation. Behind it all was the relentlessly growing demand for AI and related cloud-computing services.
Microsoft's stock surged 8% Thursday. It had fallen after each of its past three quarterly reports. It needed a win, and AI delivered. It's now the only Magnificent Seven stock showing a gain for the year (of slightly less than 1% at yesterday's close). Most of the rest are down between 14% and 30% since the start of the year.
The exception is Meta Platforms (META), down just 2.3%, which also reported on Wednesday after market close.
Meta reported $42 billion in quarterly revenue, higher than expectations. The company expects revenues to grow between 8% and 16% during the current quarter. It made $16.6 billion in net income in the quarter. Meta expects to cut operating expenses by $1 billion this year and raised its 2025 capital-spending estimate from a range of $60 billion to $65 billion to between $64 billion and $72 billion. Most of that will be spent on AI. Its stock finished Thursday up 4%.
Now, as we said earlier, stocks still fell in April... but by less than 0.8%. At one point last month, the S&P 500 was down 15% since January 1. But now it's less than 5% below where it began the year. Apparently there's nothing to see here... and Trump's tariffs are a nonevent.
It's as if the market is saying that as long as a few megacaps are gushing enormous cash profits, everything is just fine...
If that's what the recent rally is indicating, it seems wrong to me.
For example, data compiled by Bloomberg indicates that 43.5% of the Russell 2000 Index's companies (there were 1,935 as of yesterday) lost money before interest and taxes in the most recent 12-month period. These stocks are down an average of 19% so far this year, much worse than the overall Russell 2000, which is down 11% in the same period.
This little unprofitable group of poor market performers barely registers in the grand scheme of things. Combined, these hundreds of companies have a market cap of roughly $710 billion – about 1.2% of the total U.S. stock market capitalization and less than each of the 12 largest S&P 500 names.
Still, these companies collectively employ more than a million people. I have to wonder how nervous their employees are feeling these days.
Overall, the latest survey from the nonprofit think tank The Conference Board suggests Americans are more terrified about their personal income and employment than they've been in years. As the organization's senior economist of global indicators, Stephanie Guichard, recently said:
Consumer confidence declined for a fifth consecutive month in April, falling to levels not seen since the onset of the COVID pandemic... Notably, the share of consumers expecting fewer jobs in the next six months (32.1%) was nearly as high as in April 2009, in the middle of the Great Recession. In addition, expectations about future income prospects turned clearly negative for the first time in five years, suggesting that concerns about the economy have now spread to consumers worrying about their own personal situations.
Folks are worried about their jobs, and they're only about as confident in the future as they were in the depths of the pandemic. That was after a one-month 34% stock market rout as global governments shut down the world economy.
People worried about their jobs don't spend as much. People who lose them spend even less. Then the companies they're no longer buying from lay off workers, who spend less... and a vicious recessionary circle begins.
No, I'm not saying a recession is imminent or even guaranteed.
But it's worth noting that consumers and workers are looking ahead and don't like what they see... And yet, after a little volatility, the stock market is once again optimistic about the future.
They both can't be right.
And we could find out who's more or less right sooner than you might guess...
Ryan Petersen, CEO of logistics provider Flexport, suggested in a recent Bloomberg interview that we're a few weeks away from a rough ride:
What we've seen since the tariffs, since April 9, is a 60% decline in bookings. That's not a Flexport number. That's industrywide for ocean freight. You place a booking about three weeks before the container leaves China, and then it arrives in the US of course about a month after that. So, this all started about three weeks ago. You're going to start to see arrivals at the port of Long Beach [California] drop, from China, by 60% in the next few weeks, and then weeks after that for east coast ports, Gulf coast ports.
Petersen's concerns make perfect sense, but we might see the effects he's talking about sooner than "the next few weeks." The Port of Los Angeles (located next to the Port of Long Beach in San Pedro Bay) expects container volumes to drop 35% starting next week. "A number of major American retailers" have halted all shipments from China, according to the port's executive director, Gene Seroka.
Lots of folks make a living assembling, shipping, and selling all those parts and goods that won't be arriving on American shores. If they wind up with nothing to do, unemployment could rise, confirming the fears apparent in the Conference Board survey.
The stock market won't take that well, especially not in the wake of the first negative GDP growth report since the first quarter of 2022.
No matter how much you like the long-term implications of Trump's protectionist trade policy, you should absolutely expect near-term damage.
And though you'll never catch me making an outright market prediction, it sure seems like there's a greater-than-average chance that the bear market I feared we'd see might have already begun.
The Nasdaq Composite and Russell 2000 indexes both closed down more than 20% for the year on April 8 – the tariff-tantrum bottom. That's technically bear market territory.
We won't know for sure if we're in a bear market until long after it's true... But it sure looks like we're headed that way.
Buckle up.
New 52-week highs (as of 5/1/25): CME Group (CME) and K+S (KPLUY).
In today's mailbag, feedback on yesterday's edition, which discussed Trump and tariffs, of course – plus a reply to a few mailbag comments... and another view from China... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Referring to President Trump calling into a primetime TV show, today's (May 1) Stansberry Digest stated, 'The interviewers asked about tariffs as part of a series of... well-informed... questions.'
"Forgive my skepticism, but they were uninformed unless they discussed Triffin's Paradox, which says that a country with a reserve fiat currency must run trade deficits and inflate its currency so that other central banks can accumulate it. Tariffs are therefore, ahem, urinating into the wind with regard to trade deficits. To add to the irony, Trump has threatened to sanction countries that try to ditch the US dollar in trade or as a reserve currency when, in light of Triffin's Paradox, this would help reduce the trade deficit. The US ran a trade surplus until 1970. After Nixon abrogated Bretton Woods, trade imbalances were no longer settled in gold, Unsurprisingly, the trade deficit and national debt have since skyrocketed." – Subscriber Greg U.
"Howdy, The tariff policy has done so much psychological damage in the minds of other countries with the perception of the USA which goes far beyond just the tariffs. [Yesterday's] ISM report was quite bad by the way as a byproduct [The monthly Institute for Supply Management Manufacturing industry survey showed economic activity contracted for the second month in a row]. The uncertainty is through the roof...
"I've tried my best to email the [White House] several times to explain that we're a consumer and service economy. Our debt is our problem based on decades of administrations. I recommended a use tax which would allow for some flexibility features to generate tax revenues rather than these negatively perceived tariffs.
"We will end up isolated if this policy proceeds. All the data we use to measure our economic activity will abruptly change for the worse. We're already seeing examples of this and the trend will only increase. I really don't think other countries have any desire to negotiate. The consumer will pay the price and the consumer [is] NOT in the great shape... The consumer [is] putting everything on credit cards!..." – Subscriber Rodger G.
"Wow, a lot to cover here. First, [yesterday's] Digest was a perfect example of why I consider it can't miss reading. Lots of excellent data, covered concisely and thoroughly. Second, that includes your answer to reader Peter D, which I thought was pretty much perfect. And finally, in response to reader Frank C, I think the answer, which I'm sure he well knows, is neither." – Subscriber Sherwin R.
Corey McLaughlin comment: Thanks, Sherwin, for the kind words. We love when our readers write in and have some healthy debate with each other (and us) in our mailbag, too. So, keep it coming.
"According to news reports that I consider reliable, Chinese workers are rioting and protesting the fact some have not been paid, some since January of '25. [Editor's note: We see these reports, too.] Will this put any pressure on the Xi government, or will, as in the past, just ignore them? [Editor's note, continued: We're not sure.] Either way, there will be consequences for the workers." – Subscriber Randy W.
Good investing,
Dan Ferris
Medford, Oregon
May 2, 2025