The Harder They Come, the Harder They Fall!
After two consecutive years of 20%+ gains, US equities were priced for perfection. The Trump uncertainty has led investors to price in a possible recession and shrink valuation. Let's dig in...
We’ve gone from “Sitting in Limbo” five weeks ago (here) to falling hard. Risk happens fast.
What’s happening?
In our view, investors have been questioning whether President Trump’s policies will lead the US into a recession.
As we wrote on Tuesday, Treasury Secretary Bessent recently said,
“The market and the economy have just become hooked, and we’ve become addicted to this government spending, so it's a much-needed course adjustment.”
He was not wrong. We showed the Fiscal Deficit as a % of US GDP (chart 4 here) which reflected spending and a deficit that was at crisis levels.
In chart 4 below, we show a breakdown of the US Federal Income and Spending.
Today, in an interview, Treasury Secretary Bessent said:
“The easy thing for us to have done, would have been to come in and just keep this massive spending going. But it’s unsustainable. Could we have kept it going for another 4 years? Yea maybe, but you’re risking financial calamity down the road.”
The Trump administration, in other words, is willing to take near-term pain (and blame it on President Biden) to create, in their view, longer-term stability.
From a market standpoint, prudent investors need to acknowledge that as government spending is reduced, GDP will naturally come down (C+I+G) and recessionary risk (negative GDP) moves higher.
If we were to consider that equities on average drop around 30-40% in recessionary periods, if investors price in a 50% chance of a recession, we can consider the possibility of a 15-20% drawdown.
Unfortunately, as we highlighted on Tuesday, the average individual stock often does worse than the indexes during sell-offs.
As we highlighted on Tuesday, we expect a bounce, however, given the lack of energy in yesterday’s bounce and the fact that the indexes are below their respective 200-day moving averages, we would treat the bounces with caution.
In our view, until further notice, the US equity market is guilty until proven innocent.
The Harder They Come, the Harder They Fall.
1. The Nasdaq 100 ETF: Looking More Like Early 2022 than March 2023
Source: TradingView. Through year-to-date 2025.
The chart above shows the Nasdaq 100 ETF (ticker: QQQ) with its 200-day moving average (curved light blue line).
Anytime price falls below its 200-day moving average, we want to see the response.
In the case of the Nasdaq 100, we want to see if the current period is more like:
early 2022 (left green arrow), when the Nasdaq 100 moved back to its 200-day moving average two times before falling further, or
March 2023 (right green arrow) when the Nasdaq 100 fought with its 200-day moving average and then meaningfully moved higher.
(This is similar to what we wrote about the S&P 500 on Tuesday).
We expect a bounce back to the 200-day moving average (~4% from today’s close).
Typically, when the Nasdaq 100 has moved above or below its 200-day moving average, we want to see a quick reversal to negate the prevailing trend.
In the current case, the Nasdaq 100 ETF has fallen far enough below its 200-day moving average to raise our concern that a move back above will not be easy. In addition, the amount of time it is taking to build energy for an upward move is a yellow flag for us.
In general, what this means for us is that we expect a bounce to the 200-day moving average (maybe slightly above), but we can’t trust that the initial bounce will be the beginning of a more sustainable move higher.
As a reminder, my mother always says nothing good ever happens under the 200-day moving average (or in Central Park after midnight).
(This is not a recommendation to buy or sell any security and is not investment advice. Past performance is not indicative of future results. Please do your own research and due diligence).
2. The Average Stock: As if the Last Year Never Happened
Source: TradingView. Through year-to-date 2025.
The chart above shows the Equal Weight S&P 500 ETF (ticker: RSP).
In our view, there are two interesting characteristics of this chart:
The Equal Weight S&P 500 ETF - what we think of us as the “average” S&P 500 stock - is now back to the level it first hit a year ago (March 28).
The Equal Weight S&P 500 ETF peaked in late November - about three weeks before we rang the bell (“ding ding”) at what we thought might be a top in the Nasdaq 100.
While we didn’t identify the Equal Weight S&P 500 ETF as a sign at the time, clearly looking back, this was an early warning indicator. This is why we always look to a broad range of charts and relationships to “confirm” moves in the main indexes.
At this point, we believe a bounce from the March 2024 high is likely, however, as stated in chart 1, we would not “trust” this bounce and would view it as “guilty until proven innocent.”
(Past performance is not indicative of further results. This is not a recommendation to buy or sell any security and is not investment advice. Please do your own due diligence).
3. A Detailed Look at the US Budget Deficit
Source: Bespoke. Through year-to-date 2025.
The chart above shows the Federal Receipts and Outlays by Function that Net to the $307 billion US Budget Deficit for February 2025.
While most of my charts are accompanied by commentary sometimes it is important simply to provide information.
One item I might note is Net Interest ($74 b for the month).
It is now a larger outlay than National Defense ($65b for the month).
Furthermore, as 1/3 of the $36 trillion needs to be refinanced before 2028 (chart 4 here) and the US continues to have a budget deficit (additional borrowing) - interest expense as a line item in the budget will continue to grow.
(Past performance is not indicative of future results. This is not a recommendation to buy or sell any security and is not investment advice. Please do your own due diligence).
4. 10-Year Treasuries
Source: TradingView. Through year-to-date 2025.
The chart above shows a short-term view of the 10-Year US Treasury Yield.
In late January (here), we began to look at the possible development of a head and shoulders pattern (the three light blue arcs) in the 10-Year US Treasury Yield.
We provided an update in early February (here) and in both instances recognized 4.20% as a target.
Although there was more of a fight at the neckline (4.50%) in the formation of the right shoulder than is typical, the pattern played out and the target was hit.
Looking at the 10-Year US Treasury Yield now, it seems as if a larger head and shoulders may be forming (the three green arcs).
If the larger (green arc) head and shoulders pattern were to fully develop, it would suggest:
a move higher in 10-Year US Treasury Yields from a current level of 4.30% back up to the neighborhood of 4.50%;
a drop back down to 4.20% (the neckline of the large head and shoulders);
a possible battle (?) at the 4.20% area; and,
if the pattern fully develops - a final move to 3.60%.
Remember, lower yields may be a goal of the current administration.
As we showed in chart 4 here the US has $36 trillion of debt outstanding with an average interest expense of 3.4%. Half of that debt needs to be refinanced between 2025 and 2027.
Interest expense is already a larger US budget item than defense spending (se chart 3).
This is all to say that the US needs lower interest rates to refinance its massive debt and Treasury Secretary Bessent (and President Trump) recognize this.
This is one reason we believed that Quantitative Easing (QE) (or balance sheet expansion by another name) where the Fed lowers long-term rates by buying Treasury securities in the market was a possibility this year.
Within that context, we would not be surprised to see the large head and shoulders of the 10-Year US Treasury Yield to come to fruition and for the 10-Year US Treasury Yield to hit 3.60%.
(Past performance is not indicative of future results. This is not a recommendation to buy or sell any security and is not investment advice. Please do your own research and due diligence).
5. Global Equities…
Source: TradingView. Through year-to-date 2025.
The chart above shows the S&P 500 relative to the MSCI All Country World ex-US ETF (ticker: ACWX) from 2009.
This is a chart that we’ve shown several times (most recently here), but typically, we have shown the relationship in an uptrend channel.
What we wanted to show today is that over the past 15 years, the S&P 500 relative to the MSCI All Country World ex-US has often moved back down to "prior peaks” (blue horizontal lines) or established floors and then resumed its uptrend.
After the recent underperformance of US equities relative to Global equities, the relationship has once again moved back down to a prior peak.
If it holds and the S&P 500 begins to outperform the MSCI All Country World ex-US once again, we would see the recent MSCI All Country World ex-US outperformance as a normal reversion to the mean within a longer-term uptrend.
If the current floor level at the February 2024 peak (we’ve erased a year of S&P 500 outperformance) does not hold, we need to acknowledge (and look for further evidence) that the environment has significantly changed and we will revise our regional allocations.
As we’ve been writing for the past few weeks - the 2025 economic and market environment is not like that of 2024.
(Past performance is not indicative of future results. This is not a recommendation to buy or sell any security and is not investment advice. Please do your own research and due diligence).