Sunday, May 4, 2025

Is the Stock Market a Good Indicator of How Well President Trump is Doing?


With every major news media outlet predicting the downfall of the American economy it is no wonder the stock market has fallen off a cliff.

The question is: is all this real or is it simply a bad case of the old times, THE SKY IS FALLING aided by very sophisticated game playing.

One thing is for sure. If you watch the news or any of the awful cable networks you could easily begin to believe that everything you buy is going to be sky high-priced, your 401K is going to look like a black hole, everything from the hot dog stand on the corner to the bastions of manufacturing and retailing are simply going to crumble.

And they would have you believe that Donald Trump is solely responsible for all that is about to happen.

Ever since President Trump began announcing tariffs and adjusting them on the fly the stock market has been through a roller coaster of difficulties using the application and management of the tariffs as the excuse for the volatility.

The fact is that a lot of people in hedge funds, and the big investors have made a lot of money off the roller coaster ride of the stock market.

Impact of High Leverage on Market Volatility in Q1 2025
Research provided by ChatGPT

High Leverage and Volatility in Q1 2025

During Q1 2025 financial markets were unusually sensitive to even modest news or rumors. In many cases hedge funds and other institutional investors had carried high net leverage (often 40–60% or more), so small shifts triggered cascade effects. For example, growing “tariff war” fears around March caused a sharp selloff: U.S. stocks plunged on March 10 as “relentless tariff wrangling” and government shutdown worries raised recession risks​reuters.com. The tech-heavy Nasdaq fell ~4%, its worst day since 2022​reuters.comreuters.com. In that selloff high-profile stocks tumbled (Tesla –15.4%, crypto-related Coinbase –17.6%)​reuters.com, reflecting how crowded long bets were being unwound. In short, even speculation about trade policy or other “bad” news led leveraged funds to de-risk aggressively, amplifying the moves.

  • Trade-policy shocks and margin calls. U.S. tariff announcements (and related rumors) drove one of the Q1’s biggest jolts. In early April, President Trump abruptly unveiled broad new tariffs, and global markets “plummeted” over three days​reuters.com. Volatility-targeting funds alone reportedly had $25–30 billion of equities to sell, plus another $23 billion from leveraged ETFs​reuters.com. Brokers issued massive margin calls: OSTTRA data showed derivative-related calls nearly tripled after the tariff news​reuters.com. Variation margin alone jumped ~35% (extra collateral needed), implying hundreds of millions in new cash demands per fund​reuters.comreuters.com. A Bank of America note likened the vicious selling to a “feedback loop” – even safe-haven assets like gold fell as leveraged funds scrambled for cash​reuters.comreuters.com. In Asia, Chinese stocks fell sharply (Hong Kong tech index was off ~27% in one month​reuters.com) and outstanding margin loans in China stayed very high (¥1.9 trillion)​reuters.com. South Korea’s market also saw a spike in forced sales: in two days after lifting a short-selling ban, about ₩28 billion of stock sales were triggered by margin calls (versus ₩11.5 billion for all of March)​reuters.com.
  • Sectoral squeezes. Leveraged hedge funds tend to crowd into “hot” sectors, so when prices turned, the selling pressure was extreme. For instance, technology and consumer names – where many funds were heavily long – bore the brunt. Goldman Sachs noted that a tech-driven selloff on March 6–7 wiped out roughly half of many funds’ 2025 gains​reuters.comreuters.com. On that day the Nasdaq plunged 4% (its largest drop since 2022), and growth stock indexes fell ~3.8%​reuters.com. Major tech issues and related stocks crashed: Tesla plunged 15.4%, its biggest 1‑day fall since 2020​reuters.com, and crypto plays like Coinbase and MicroStrategy dropped ~17% each​reuters.com. Reuters reported that hedge funds had been “mostly long” these sectors and got caught in the selloff​reuters.com. Consumer discretionary was another crowded long, and funds dumped those stocks heavily, anticipating a downturn​reuters.comreuters.com. Conversely, when any positive spin emerged (e.g., post-election in Germany), even defensive or small-cap stocks rallied. After Germany’s Feb 23 election, for example, domestically-focused mid-cap stocks jumped ~1.5% on hopes of a pro-growth government​reuters.com.
  • European political shifts. Policy news in Europe also fueled volatility. In particular, Germany’s snap election (Feb 23) and talk of changing the constitutional “debt brake” kept markets on edge. Polls leading up to the vote repeatedly warned that a blocking minority of fringe parties (AfD and new left party) could “unsettle markets” by preventing fiscal reform​reuters.com. Reuters noted that Europe’s largest economy could see “months of uncertainty” and that elections were a key focus for traders​reuters.comreuters.com. In practice, investors bid up German stocks when a business-friendly outcome looked likely (DAX +0.6% on Feb 24​reuters.com), but even then “some uncertainty lingered” – the AfD and Left secured enough seats to block changes to the debt brake​reuters.com. More broadly in Europe, hedge funds sold record amounts of stocks through March and April. A Goldman report found March–April selling was at a 10-year high, driven by U.S. tariff fears and a strengthening euro hurting exports​reuters.comreuters.com. Hedge funds especially unloaded single stocks in tariff-sensitive sectors (autos, luxury goods)​reuters.com and kept heavy short bets on pharma until late April​reuters.com.
  • Leverage ratios and forced liquidation. All these swings were amplified by leverage. Hedge funds often borrow cash or stock to boost returns, so when markets tumble, they hit margin calls. Morgan Stanley reported that U.S. long–short funds’ net leverage (net exposure as a % of NAV) fell from just over 50% in January to only ~37% by early April – “just shy of historical lows”​reuters.com. This rapid deleveraging was largely in response to margin calls. OSTTRA’s analysis showed a hypothetical fund with 100 daily margin calls ($5M each) would normally need ~$500M in collateral, but the tariff shock added roughly $900M more per day, raising obligations to ~$1.4B​reuters.com. In short, variation margin requirements exploded. Prime brokers noted that even traditionally defensive stocks were being liquidated – a classic sign of forced selling under margin pressure​reuters.com. One strategist quoted how smaller funds are like “dinghies in the wake of a supertanker” – when big multi-strategy funds dump positions, liquidity vanishes and weaker players can “capsize”​reuters.com. For example, a JPMorgan note found hedge funds unwound single-stock bets on Friday March 7 to the greatest extent in two years (comparable to March 2020)​reuters.com. This synchronized selling was exactly the “waterfall” effect driven by high leverage and margin calls.
  • Retail and ETF leverage. Elevated leverage wasn’t limited to hedge funds. Retail investors flocked to leveraged ETFs after the selloff, magnifying short-term moves. By late April leveraged equity ETFs had record inflows (~$11 billion in April alone) as investors tried to “catch the rebound” from the tariff-induced drop​reuters.com. These products target multiples of daily returns, and their rapid buying/selling can itself deepen swings (and trigger margin call-style liquidations in the futures markets underlying them)​reuters.com.

In summary, the high leverage in hedge funds and institutional portfolios meant that even modest news or rumors – from tariff tweets to election polls – caused outsized market moves in Q1 2025. Sectors with crowded, levered bets (notably big tech, consumer goods, Chinese tech, and luxury names) saw the most violent swings. As reports noted, the “cavalry” (Fed or Government action) was not coming to bail them out in the short run​reuters.com, so declining collateral values forced mass liquidations. Analysts emphasize that when leverage is high, volatility begets more volatility: margin requirements and forced selling created feedback loops that amplified every hiccup in the news cycle​reuters.comreuters.com.

Sources: Contemporary market reports and analyses (especially from Reuters) document these events and quantifications​reuters.comreuters.comreuters.comreuters.comreuters.com.

Let's look at this in comparison to sports betting or Sportsbooks

DFINITIONS:


A sports book (or sportsbook) is a place or organization that accepts bets on sporting events. These bets can be placed on a wide variety of outcomes, such as which team will win a game, the total number of points scored, or specific player performances.

Key Characteristics:

  • Types of sports covered: Football, basketball, baseball, boxing, horse racing, soccer, and many more.
  • Betting options: Moneyline (winner), point spread, over/under (totals), parlays, futures, and prop bets.
  • Formats:
    • Physical locations: Often found in casinos (especially in Las Vegas or regulated jurisdictions).
    • Online sports books: Accessible via websites or mobile apps in areas where sports betting is legal.

  Let us rewrite this approach for the financial markets.

A MONEYBOOK is a place or organization that places and accepts bets (buys and sells) on financial instruments: based on, rumors, media opinions and events. These bets can be placed on a wide variety of outcomes, such as which organization or company will gain or lose, the total amount of money gained or lost, or specific company performances. They can also be triggered by the financial condition of the holder of the securities i.e.: leveraging.

Financial leverage is the strategy of using debt to acquire additional assets, with the aim of amplifying returns to equity holders. The idea is to use other people’s money to potentially earn more than you would with only your own capital.

Key Characteristics:

•  Types of activity covered: Everything that is publicly traded on the stock markets and the accompanying financial instruments.

•   Selling/Betting options: Market Order, Limit, Long, Short, Day Trading, Swing Trading, Futures and custom methods.

•  Formats:

o  Physical locations: Often found on Wall Street, primarily in the office of investment firms, hedge funds, financial management firms, banks and computer programs that are programed to buy or sell based on complex algorithms.

o  Online MONEYBOOK: Accessible via websites or mobile apps accessible everywhere.

So, if you look at this carefully you could conclude that the stock market these days is merely the millennials Sports Book. When The American stock market has become nothing more than people betting on speculation and rumors with your money but not facts.

 It is time to look for a different economic measure for how we are doing.

E-mail Doc at mail to: dr.gwebb@yahoo.com or send me a Facebook (E. Eugene Webb) Friend request. Like or share on Facebook, follow me on  X at  @DOC ON THE BAY. 

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