Present day investors have gotten used to shrugging off stock market corrections, with phrases such as “BTFD” becoming popular among the younger demographics. And why not buy the frickin’ dip, when every correction you’ve seen has disappeared faster than a pothead at a police convention? The general trajectory of the market for the last ten years or more has been to quickly rebound after even the slightest fall. The coronavirus-induced drop was over by June 2020, only a few months after COVID was officially declared a pandemic. Even though it devastated numerous industries (sadly, more small businesses than big businesses), the pandemic’s impact on the stock market was rapidly forgotten. Even the late 2008 crash had become a rebound by spring 2009, though it would take till 2013 to reclaim the peak reached in late 2007.
To make a long story short, investors today have no collective memory of an honest to goodness years-long bear market in stocks, such as the Great Depression or the disaster that befell the Nikkei starting in the early 1990s. No wonder people are so cavalier.
Will this correction be quickly erased, just like all the earlier ones? Possible. Even likely. But there are a few reasons why it might not, and I think these are worth exploring.
Reason #1: President Trump might not be a tailwind this time.
It sounds crazy to say this because Donald Trump’s symbiotic relationship with the stock market from 2017-2021 was so memorable. He couldn’t get through a rally without reminding the crowd to check their 401(k)s. He turned in a positive month for every month in 2017, his first year in office. He was heartbroken when all his gains were wiped out during the pandemic.
But this time might well be different. And there are a few reasons. Let’s take a look at the prime reasons Trump was so positive last time, as well as why those might have changed.
Taxes: Some would say the great majority of Trump’s stock market gains in his first term came from the tax cuts. Not only did individuals get a tax cut, incentivizing future buying, but the corporate tax cut was reduced bigly, from a 39% top rate to 21%. Income repatriation was encouraged. First of all, even if another tax cut is done, it won’t be nearly as large, because it’s just not possible to cut taxes that much again. Secondly, one probably won’t be done, because the country’s fiscal situation is just too dire, and 40% of our revenue is going to interest, for crying out loud, and the GOP won’t be able to ramrod it through with the razor-thin majorities they have, unless they convince every single deficit hawk to vote for it somehow. Not only is a new tax cut unlikely, an extension of the old one may even be in jeopardy, as recent news articles indicate.
Regulation: In term 1, Trump hated regulation, put lobbyists in charge of the EPA and an Amway heiress in charge of the Department of Education, etc. In term 2, he literally has RFK Jr. running HHS. My friends who manage health care stock portfolios are going gray in their twenties. I don’t think RFK will be able to do much, but it’s a radical departure from Trump’s previous approach. He’s also made noises about making changes to the food system—although his FDA nominee is not like RFK, RFK might have the president’s ear? Even J.D. Vance signals a change, as he comes from the new breed of GOP “populists” who at least purport to dislike big companies, particularly tech.
Tariffs: I’m not totally opposed to Trump’s tariff program, but there’s no doubt it’s bad for the stock market. The stock market loves the status quo: our current relationship with China, open trade, the American worker be damned. Tariffing China means higher costs for pretty much the whole Fortune 500, not to mention the possibility of reciprocal tariffs cutting into revenues. And the tariffs this time seem much larger and more impactful than they were last time. Will Trump back down because the stock market is down? Possibly. But he may not. After all, on the campaign trail he said that tariffs were his favorite word in the dictionary. “Better than love.” Those were his exact words.
Reason #2: Inflation is not going away.
Despite four-plus years of breathless regular headlines from the mainstream financial media about how inflation was finally over, it is in fact going in the wrong direction, and has been for some time. This is covered in painstaking detail by the inimitable Wolf Richter over at Wolf Street—I’d recommend reading his latest write-ups if you’re not convinced of this fact already.
What does that mean for the market? Well, it’s not great, especially since it means bond yields will also stay high to compensate investors for the inflation risk they are taking. Inflation generally poses a difficult environment for companies, who face rising costs and a pressure to rapidly turn inventory that is not present in normal macroeconomic situations. While the stock market was indeed strong when inflation first cropped up in 2020-2021, that time differed because monetary policy was massively accommodative, and households were doing well enough to spend. Now, the Fed is tightening via QT, and the consumer is pinched. This time inflation might hurt a lot more.
Reason #3: Not to sound like that guy, but the market is already wildly overvalued.
There’s always a guy at every party who talks about how the stock market is going to come crashing down. Rest assured I’m not a “permabear” or anything like that. I’m not Jeremy Grantham, David Stockman, Jeffrey Gundlach, or a Zero Hedge premium member. I think there’s plenty of value to be found in the market, I have an active long portfolio, and was buying some names even at the all-time highs.
However, it’s hard to argue with the fact that at the February highs, the S&P had doubled since five years earlier, and tripled since ten years earlier. I’ve read two dozen explanations of why that upturn happened for structural reasons. More retail trading. Options. 401(k)s. The shift from active to passive. Complacent analysts. Tax cuts. Low interest rates. Corporate buybacks. (Some of the write-ups on how the market performs inside vs. outside buyback periods is fascinating.) I haven’t read one explanation of how S&P 500 companies have actually generated enough value to justify a triple in ten years. Because, frankly, they haven’t. Since Steve Jobs introduced the iPhone in 2007, tech companies have (perhaps correctly) stuck to incremental and consistent innovation. The only major new product that’s been introduced since then is GPT chatbots, which haven’t led to nearly the level of disruption they were supposed to.
All the above reasons as to why the market has been so strong lately are probably part of the truth. But the bigger explanation might be the dominance of tech stocks. The Magnificent Seven (Nvidia, Meta, Apple, Amazon, Microsoft, Google, and Tesla) made up over half the S&P, as well as over half of its gains, in 2024. That’s right, over half the gains came from seven stocks, or just under 1.5% of the index.
It's not entirely clear why those stocks would continue to go up, or even to stay where they are. All of them face challenges, with the possible exceptions of the evergreen Amazon, as well as Microsoft, which is in a good position after its OpenAI investment. Nvidia is facing competition from cheaper AI models and sky-high expectations. Meta is dealing with a stagnant and aging user base in its core product Facebook. Apple’s products are so good that people only buy them every five years. Google faces an existential threat to its search business from chatbots and a major threat to YouTube from TikTok. Tesla is run by an erratic CEO who is currently alienating most of the world with his political adventures.
Is a drop guaranteed? Certainly not. But risk is asymmetric to the downside.
In conclusion, is there a strong chance the market goes back up and all is forgotten? Absolutely. And I wouldn’t be surprised in the least if that occurred. But if the bounce doesn’t come and this turns into a serious downturn, there certainly won’t have been a shortage of reasons.
P.S. This is my first post on Substack, and I would love it if we could get some exponential growth going. If you liked this post, please share it with two people!
How about all the new technologies right now? New technologies tend to drive economic growth.