🤮 Self-induced vomiting

Hey hey, happy Monday.

Greetings from Costa Rica. I escaped the world on Saturday morning to spend a week basking in the sun like a lizard. Because I’ll be off the grid, there will be no OptimistiCallie on April 14. I’ll come back swinging the week after.

Also, I realized that the link to Morgan Housel’s magazine architects piece was broken in last week’s newsletter. My bad! Here’s a link to the piece. I’m triple-checking it so you don’t get another dud.

This week, we are talking about the obvious. The stock market’s biggest crash since COVID, and what comes next. It’ll take 7 minutes of your time.

Are you feeling anxious? OK. Before you read this, do me a favor and breathe in for five seconds, hold your breath for five seconds, and breathe out for five seconds. In. Hold. Out. Calm your nervous system through box breathing if you get too wound up.

Here we go.

Smash the button below to share OptimistiCallie with a friend 😊

Risk less with structured protection ETFs.

What do you say after the biggest back-to-back market losses in a generation?

Do you try to rationalize what feels largely irrational? Do you try to appeal to people’s psyche, knowing everyone is wrestling with a complex mix of fear and frustration? Do you gather them like a football coach for a motivational pep talk? (I have been partial to the pep talk in past crazy moments)

You’re getting all of these flavors from Wall Street experts right now as they try to put the pieces together.

I’ll tell you something they won’t: us strategists in our silly ivory towers aren’t in a significantly better position to talk about this than you are. Sometimes extreme 'black swan' events just happen—and nobody can fully make sense of them. As the biggest change in trade policy in over a century, I think this moment qualifies.

I don’t have all the answers for you today, and I’d be lying if I said I wasn’t anxious myself. 

But as usual, I’m here to share my thoughts. Find some logic in illogical forces. Ground you when the world feels like it’s crumbling.

Here’s what keeps cycling through my head.

This is self-induced vomiting. Fine, I’ll say the quiet part out loud. It didn’t have to be this way. The U.S. didn’t have to shoot itself in the foot to save its arm. In past crises, it’s been us versus this weird external shock that we’re all trying to understand. A sense that we’re all in this together. Cheering on healthcare workers, railing against Wall Street, banding together to bring the troops home. This moment doesn’t feel like that. The country is torn in two, and it’s incredibly isolating.

A recession might be coming. I could say a lot about the fundamental impacts of these dramatic reciprocal tariffs here, but I’ll leave this to the PhDs. Tariffs are ultimately a billion-dollar tax hike on you and me. Yale’s Budget Lab suspects the cumulative impact of all tariffs could cost U.S. households an average of $3,800 and shrink the economy by $100 billion this year.

Not only that, but the chilling effect from so many extreme tariff threats may have already caused significant damage through delayed spending and investment.  Now, businesses have to contend with the fallout from a sudden drop in equity prices and the inability to borrow money through seized-up credit markets. At the risk of sounding like Captain Obvious, businesses aren’t exactly enthusiastic about hiring new people or launching bold revenue-generating projects when their stock is in freefall. Well-known companies like Apple, Starbucks, Palantir and Bank of America saw 15% of their market value evaporate in 48 hours. That’s serious stuff.

We may be in a situation where people stop making or spending money. Unfortunately, that’s the classic setup for a recession.

All recessions are different, but kind of the same. Each recession may look and feel different. But if you take a step back, there are some common threads in fundamentals and behavior.

There’s an initial shock as everybody grapples with a new reality. Then, people assess the damage through economic and company-specific data and clues. Ultimately, the stock market uses these cues to settle into a new center of gravity dependent on how far earnings fall, how bad the unemployment crisis is, and how fearful people are of the future.

Let’s put some numbers behind this. Unemployment has surged during every economic crisis in the past five decades. Makes sense – companies cut jobs to manage costs, Americans lose income, and consumer spending – the source of 70% of our economic output – falls. Company profits fall as revenue dries up. S&P 500 profits have dropped an average of 20% in every recession since 1960 (as far back as my earnings data goes). Shareholders sell their stock in companies in anticipation of lower profits, not knowing how far earnings will ultimately fall until we’re out of the crisis.

The most bread-and-butter way to value a company is by its earnings, and the expectations of future earnings. Multiply that reaction by thousands of companies, and you’ve manufactured a huge stock-market drop. The S&P 500 has fallen an average of 34% in every recession since 1960 – as little as 14%, and as much as 57%. We’re down 17% so far.

This isn’t a crisis of confidence. At least not yet. The worst-case scenario now is if investors lose confidence in the U.S.’ ability to pay back its debts or support deep and transparent stock markets. On a broader scale, if people lose faith in the U.S.’ democracy, the rule of law, and the sanctity of contracts.

I hate to go there, but frankly, people are asking me about this. And as an analyst, it’s important for me to address what’s at stake.

We’ll know confidence in the U.S. is eroding when people start selling out of U.S. assets en masse. When people start banging down the doors to get out of Treasuries, or U.S. government-backed debt – the largest and most prominent asset we offer to investors around the world. 

That’s not happening yet. People have actually bought more Treasuries over the past few days. The U.S. dollar is declining, but not in freefall. There’s a lot of obvious pressure on our checks and balances, but for now, there’s an abundance of confidence in U.S. markets. We have decades of soft power to back us up, and I don’t think we lose this hard-earned reputation all at once.

My colleague Josh Brown wrote a great piece on why the rule of law matters to our markets.

The stock market is the ultimate check. I, like you, am concerned about the lack of checks and balances right now. And when I start to doom loop about the rule of law, I find comfort in knowing that the stock market is the ultimate check on power.

To quote Michael Cembalest, chairman of market and investment strategy at JPMorgan Asset Management: 

This rant may feel too cheesy for the moment, but I truly believe capitalism could be a needed gut check in these times. Do you really think America’s best-known CEOs will just swallow a 20% hit to their stock prices and move on quietly?

Maybe, but I wouldn’t bet against Americans’ love of money.

You are resilient. Yes, this moment hurts. But you are a human with complex feelings, emotions and incentives. Your brain has identified a risk and it’s screaming at you to run away. It’s working as intended. Otherwise, I’d recommend you get your head checked.

Honor your natural tendencies, but don’t listen to them. In many situations, touching the hot stove isn’t the best solution. In this particular scenario, it is – at least for most of you reading this.

Recessions and market crashes don’t last forever. Burn this chart into your brain.

Once you’re done with that, step away from the screens. Swipe out of TikTok. Hug a loved one. Touch some grass. Get in touch with your senses. The real world – the one that exists outside our frantic minds – is an automatic mood booster.

The optimist has always emerged victorious. C’mon. You’re not reading PessimistiCallie, after all — and I told you I love a good pep talk.

I know this moment is particularly scary. And while I can’t say we’ve been here before, we sure as hell have felt this way. There’s precedent in the unprecedented. 

Americans have been in seemingly impossible situations before. Not these exact circumstances, but similarly daunting walls to climb.

And we climbed them every single time.

The human spirit is a powerful thing.

Chin up, you’ve got this.

Thanks for reading!

Callie

Like what you just read? Share it with a friend, pretty please 😊