It's not 2018, it's 2022.
Paid subscriber analysis
Tariff day is behind us. The market reaction on Thu and Fri was one of the most brutal ordinal sell-offs in the past few years. -10% on SPX and -11% on NDX in two days, without any significant intraday bounce in either days. We are entering (yet another!) bear market.
These were our conclusions on Saturday, sent to our paid subscribers:
…judging by Trump’s behavior thus far, scenario 3 (full tariffs) is becoming more and more likely.
…if there is no deal by Monday, the best thing is to wait it out. The week could likely end negative, so holding shorts makes a lot of sense. I wouldn’t add to shorts if you already got them.
A bit careful there, but yeah, it happened. Big congrats if you held on to shorts coming into Thursday and/or Friday. They must have paid off handsomely. Ours did :)
✅ Good call.
We also warned about this for Monday, the last day of the quarter price action:
Monday is end of quarter, March 31st. We could get a strong rebalancing move towards the end of the day (e.g. a sharp move up), which has little to do with the macro conditions or tariffs.
The point is, don’t necessarily attribute end-of-day Monday price action to tariffs. Unless there really is a deal done by then, in which case - go for it!
✅ Good call.
And finally this, for earnings and recession expectations:
Any sign of weakness will be sold hard (again, frontrunning). If we get the full tariff scenario, it’s difficult to stay bullish in that environment. It would take very strong Q1 earnings from Big Tech (and/or significant reduction in inflation) to pull the market out of it. Chances of this happening are going down each day.
The recession is still the highest probability scenario at this point. We know what could change this, but for now, it’s not looking good.
Not yet, but increasingly looking like another good call. Especially after the correction we had the past two days. However, be wary of vol compression. More on that below.
A month ago, I did an analog analysis comparing the start of 2025 with the start of 2018, the first time Trump announced tariffs and started that whole trade war with China. That entire year was bad for markets, ending in a bear market in early 2019.
However, this is now increasingly looking like 2022, a much worse year for assets. So today, let’s do another analog and compare.
In 2022, selling started in January, after the latest FOMC minutes revealed that the Fed is indeed serious in raising rates to combat inflation. The sell-off continued sharply in February, driven mostly by the unwinding of the Mag7 stocks (all of which went down by 30-40% that year). It was the textbook econ story: higher interest rates => higher mortgage and credit card rates => lower disposable income => less spending => lower earnings => lob losses => recession.
In the tech sector the immediate impact was on higher discount factors that reduce the present value of future earnings, particularly sensitive for companies with huge valuations. So naturally these valuations go down, tech leads the sell-off and we get a bear market correction.
We then got a bounce in March, and then, after March OpEx, and particularly coming into the April earnings season, the selling intensified. That was a period I vividly remember - 8 weeks in a row of markets falling. From April to mid June.
Why do I recall it so vividly? That was the best ever period for the BASON strategy. We made 40% returns during those 8 weeks just shorting the market every week, in and out. My personal portfolio did well, too. Almost as good as the BASON.
Summer provided a relief rally that lasted for two months, and then another sharp sell in September and into October. We then hit a low of 3,500 on a daily tick, and never looked back. All those negative expectations of a recession never materialized, markets jumped on the AI trade in January 2023, and kept riding that gravy train until, well, today.
How likely is it we follow this path? The market is not done absorbing the tariff shock. Unless we see some dramatic policy shift and new “deals” being signed, the selling is likely to continue. Q1 earnings could provide the ideal catalyst that would continue the April sell-off well into the rest of Q2, much like we saw in Q2 2022. Only this time the correction could be even bigger than in Q2 2022.
The only way we see some relief rally is if tariffs somehow get reversed. But this administration is unlikely to pivot. If anything they are more likely to double down.
In 2022 we all expected a recession that never came. This time it might come.