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It\u2019s something else when global indexes plunge by double-digit amounts in just two or three days<\/p>\n
For those of you thinking the worst is behind us\u2014bad news bears all around. Monday\u2019s session brought more pain, with the Dow Jones Industrial Average shedding roughly 350 points by the close. The S&P 500 and Nasdaq also finished lower after a volatile day that saw sharp selling in the morning followed by a partial rebound. While not as brutal as last week\u2019s rout, the pressure clearly isn\u2019t letting up.<\/p>\n
Good news, though\u2014if you loved certain stocks a couple of weeks ago, you should really love them now. No matter how bad things may seem, when we look back in time, this will be a simple blip in the ups and downs of stock market performance\u2014nothing more, nothing less. While a lot of people are quick to point fingers and assign blame, this is how markets work\u2014they go up, and they go down.<\/p>\n
A lot of people have been reaching out and asking for the \u201cwhy\u201d behind the situation, so I\u2019m going to try and break it down for everyone. <\/p>\n
A lot of what we\u2019re seeing in the markets\u2014whether it\u2019s stocks, bonds, or commodities\u2014can be broken down into two main categories. I\u2019m going to walk through both, give you a bit of background, and explain why the markets are reacting the way they are. This isn\u2019t meant to be all-encompassing, but rather a general breakdown to help you settle clients. <\/p>\n
And while much of this is centred on the stock market, a lot of the ripple effects are also tied to housing, the economy, consumer sentiment, and the bond market.<\/p>\n
First and foremost, we are seeing a reaction to what the markets are viewing as a negative for economic performance. <\/p>\n
A lot of economics over the past 40 years has been based on global trade\u2014what\u2019s commonly referred to as globalism. Globalism is the reason you can buy all your stuff at the dollar store for cheap. <\/p>\n
For decades, companies have outsourced manufacturing to countries that can produce goods more cheaply thanks to lax environmental laws, labour standards, etc. Being able to make something cheaper and bring it back to the U.S. or Canada has helped company profits grow steadily over time.<\/p>\n
Since stock markets are a forward indicator, they always \u201cbake in\u201d an earnings multiple to profits to arrive at a stock price. I\u2019ll give you an example\u2014and I\u2019m going to pick on Apple. <\/p>\n
Over the last 12 months, Apple has recorded massive profits. A lot of that comes from manufacturing in low-cost countries, shipping the products back here, and selling at big margins. Apple also books a lot of its global sales through a shell company in Ireland, which is known for its very low corporate tax rate\u2014around 2%.<\/p>\n
Apple\u2019s stock trades at about 27 times earnings. If tariffs reduce those earnings, the stock price adjusts accordingly. A $1-per-share drop in earnings could easily translate to a 14% drop in Apple\u2019s stock. Multiply that across other big tech names, and you see how tariffs are pulling indexes lower.<\/p>\n
Now, I\u2019m not saying Apple\u2019s profits will<\/em> fall by $1.00 per share\u2014I\u2019m just using this as an example. Stock markets digest every available piece of information and project it forward. The companies with the biggest weight in U.S. stock indexes\u2014Microsoft, Nvidia, Apple, Meta, Google\u2014are also the most exposed to tariffs because of where they source their products and labour. <\/p>\n So, the names that drove most of the gains over the last couple of years are now the same ones dragging markets lower.This isn\u2019t anything to panic about\u2014it\u2019s just Mr. Market doing what Mr. Market does: repricing stocks based on all available info. And keep in mind, if tariffs are reversed\u2014let\u2019s be honest, the only predictable thing about DJT is that he\u2019s unpredictable\u2014Mr. Market could just as easily reprice stocks sharply higher.<\/p>\n The second reason we\u2019re seeing mass selling is something called margin. Margin is how a lot of people invest in the stock market. If you have $10,000 to invest, you can borrow against it to \u201clever up\u201d your position.<\/p>\n Leverage is an awesome way to amplify your returns in a good market, but it is also a super way to go bankrupt in a bad market. Most leverage works on a 3-to-1 ratio. Generally, you need to have 25% equity if you are a retail client. <\/p>\n So, in a $10,000 stock portfolio, there is $2,500 of your own money, and $7,500 of the bank\u2019s money.<\/p>\n The problem with this strategy shows up when there are large moves in a short period of time. I\u2019m going to pick on Tesla here\u2014not because I don\u2019t like Elon, but because it tends to be a volatile stock.<\/p>\n Back on January 20 (random day, completely random), TSLA stock traded at $426.50 a share. So, if you had $10,000 in Tesla stock, you would\u2019ve owned around 23.4 shares. Today, Tesla trades at about $239.43\u2014a drop of $187.07 per share, or roughly 43.8%.<\/p>\n The real issue is that you have lost 43.8% of your investment, but you only had 25% of the funds to lose. The remainder is the banks money on your leverage. <\/p>\n So, what happens is the bank either makes you put more money into the investment to bring it back onside, or they sell you out of the market to recover their money\u2014a process called \u201cmargin selling.\u201d<\/p>\n When the bank margins you out, they simply sell at the current market price\u2014much like a power of sale in mortgage land. With markets dropping sharply, the number of people getting margin calls each day is running about 300% higher than just two weeks ago.<\/p>\n Since markets are already down, this forced selling of the banks to recover their margin dollars simply puts more selling pressure on a down market, and that is how we get these massive down days. <\/p>\n Margin sellers are forced sellers\u2014they don\u2019t want to sell into a low market, but they have to because of margin requirements. Think of margin selling like a mortgage client coming up for renewal, only to find their existing lender won\u2019t renew.<\/p>\n They\u2019re unemployed, have zero equity, and bad credit\u2014so you can\u2019t move the mortgage elsewhere. The loan gets called, and the bank takes the asset and sells it. The difference is, mortgages and houses can take months to settle and sell. Stocks, on the other hand, move in milliseconds. Everything happens faster in the stock market.<\/p>\n These two factors are driving the massive moves we\u2019re seeing. Markets are re-pricing company profits and future global growth, while margin clients are being forced to sell into already falling markets\u2014pushing prices even lower.<\/p>\n Also worth noting is that large institutional buyers\u2014like pension funds and mutual funds\u2014are on what we call a buyer\u2019s strike. No one wants to catch a falling knife, so they\u2019re stepping to the sidelines and waiting for things to calm down before jumping back in. With plenty of selling and the big money sitting out, prices need to find a new normal before institutional buyers return.<\/p>\n A lot of people are asking why bonds and precious metals didn\u2019t offer more protection during all this\u2014especially since these two areas are usually considered safe havens during stock market chaos.<\/p>\n Of particular interest to mortgage brokers are the bonds. We saw the Canada 5s drop about 12 basis points over the week\u2014not much, considering the stock market fell by double digits.<\/p>\n Bonds (and gold) have performed well this year, but when investors are losing money hand over fist, they tend to sell their winners first\u2014sometimes to keep margin onside. Since bonds and gold were the big winners, they were among the first to be sold.<\/p>\n Selling a bond drives its price down and the yield up. While some investors were buying bonds this week as protection from the turmoil, a wave of selling counteracted that demand\u2014so yields didn\u2019t drop as much as you might expect.<\/p>\n We also have to remember that if we\u2019re truly undoing globalization with new tariffs around the world, it tends to be inflationary for just about everyone. Inflation expectations drive bond yields, so it\u2019s hard to find safety in bonds\u2014or expect yields to fall\u2014when the market\u2019s unraveling due to an inflation-driven event.<\/p>\n Also keep in mind that nearly half the drop in the Canada 5s came after the Canadian jobs report was released. Talk about a dumpster fire\u2014that was probably one of the worst employment reports I\u2019ve seen in a very long time.<\/p>\n If we see a lot more selling in equities after Monday or Tuesday, we might get a buyer\u2019s bid in bonds, which would push prices up and yields down. But if the selling fizzles out by then, bonds likely won\u2019t see much action.<\/p>\n Today we got a glimpse of the intraday reversal I had predicted, with stocks opening sharply lower and recovering through the day. This kind of selling eventually draws in bargain hunters, and we\u2019re sitting pretty close to some key technical levels. Once the emotion gets shaken out, traders shift their focus to fundamentals and charts, which could trigger either a big rally\u2014or a sharp drop\u2014in bonds.<\/p>\n Bond markets aren\u2019t stupid\u2014they\u2019ve seen this kind of thing before. This past week was likely one of the sharpest, deepest meltdowns in recent stock market history (outside of Black Monday 1987), and yet we still couldn\u2019t push yields down more than 12 bps. That tells me there\u2019s probably room for yields to move higher once we get past this stock market hiccup.<\/p>\n This is an abbreviated version of an article originally posted for subscribers of MortgageRamblings.com. Those interested can subscribe by clicking here<\/a>. Opinion pieces and the views expressed within are those of respective contributors and do not represent the views of the publisher and its affiliates.<\/em><\/p>\n Visited 83 times, 83 visit(s) today<\/p>\n bond yields bonds economic news equities MortgageRamblings.com opinion ryan sims stock market stock moves stocks tariffs<\/p>\n Last modified: April 7, 2025<\/p>\n<\/p><\/div>\nMargin calls: the silent accelerant behind the selloff<\/h2>\n
Why bonds and gold didn\u2019t come to the rescue<\/h2>\n
What comes next<\/strong>: bargain hunters, reversals, and rising yields<\/h2>\n
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