Not So Magnificent

I was very right last week, but this is after being wrong for a long time. I have been warning here since early March last year to avoid stocks. Then, I called out NVIDIA (NVDA) and Super Micro (SMCI), which were riding the wave of investor enthusiasm for artificial intelligence (AI). It was not a win at first, and NVDA is still up since then, but SMCI has melted down:

NVDA is one of the Magnificent 7, and it is down 29.8% in 2025 so far. This is a bear market by traditional definitions! The entire Magnificent 7 are plunging:

The worst one is Tesla (TSLA), which is down almost 41%, while a couple are down less than the S&P 500, including Meta Platforms (META) and Microsoft (MSFT).

Since the elections in November, all are down, with Tesla down the least:

As bad as the performance has been lately for the Magnificent 7, all are up a lot since the end of 2022:

Since the end of 2022, the NASDAQ 100 (QQQ) has gained 58.7%, while the S&P 500 has gained 32.1%. The Magnificent 7 comprise over 41% of QQQ and 29.5% of SPY. These are big numbers! So, if you own either of these ETFs or funds that benchmark the indices, you are long these stocks. I guess the good news is that the very high concentrations of these stocks have declined. In August, the Magnificent 7 were 43% of QQQ. I called them NOT SO MAGNIFICENT then. Four have declined by double-digit percentages since then, two have rallied slightly, and one, TSLA, has gained 15%.

I am not weighing in further on the Magnificent 7, but I did want to share my thoughts on the market, which sold off so sharply last week.

The Problems America Faces

The investing world is really worried about the new tariffs that were imposed Friday. While I majored in economics and could probably explain how crazy this has been, I will defer to a podcast that Ezra Klein did with Paul Krugman at New York Times. I have always liked Krugman's thinking. He shared his negativity on the moves at his Substack-hosted website. A Primer on Trade Wars is probably a good read, but I just read his summary.

The last time the U.S. suffered a recession was from very late 2007 through mid-2009. The last time we suffered a depression was almost 100 years ago! Of course, stocks crashed in 2020 after the pandemic hit. Inflation has been running higher due mainly to the pandemic and its aftermath. The changes in our policies on international trade could be inflationary, and they could also be recessionary.

Interest rates have been very volatile. Last week, they fell substantially due to concerns about inflation picking up due to the tariffs. The Federal Reserve Chairman, Jerome Powell, shared some comments that suggest that the Fed is in a tough spot.

Turning to monetary policy, we face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation. The new Administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation.

For the week, the 2-year Treasury dropped from 3.91% to 3.64%, and the 10-year Treasury fell from 4.25% to 4.00%. The FOMC has a current target for Fed Funds of 4.25-4.5%, so buyers/holders of US Treasuries must be expecting rates to decline. Will they? It's not clear.

The Federal Reserve, which has cut Fed Funds by 1%, did so in three moves. The first was on September, when it reduced rates by 0.25%. It followed up in November with another cut of 0.5%. The last cut was in December, when it reduced it by 0.25%.

When the FOMC moved in September, I suggested fighting the Fed, and this has been correct so far despite the decline in rates this week. After the Fed cut rates in September, the 2-year was at 3.62% and the 10-year was at 3.71%. So, despite more reductions in Fed Funds, the 2-year is now slightly higher in yield and the 10-year yield has increased 0.29%.

I am kind of surprised that the market reacted so negatively to the tariff changes announced on Thursday. Why weren't people more worried ahead of time? I will agree that it was worse than what had been expected. Stocks need a trigger, and perhaps the gun went off. Economies need triggers too. The last recession was a banking crisis. Perhaps this international trade situation will become a crisis that triggers the next recession (or depression).

As I have discussed here previously, the country has a big problem: debt. The U.S. owes over $36 trillion, but it continues to spend more federally than it takes in. This unsustainable situation is nothing new, as I remember being a teenager 45 years ago and learning about how bad the federal budget deficits were. Now, though, they are a lot worse. Other countries with debt challenges have done things like cut their currency price for foreigners or expanded their money supply. Inflation is what fixes too much debt.

I remember well in the early 80s how high inflation was and how high Alan Greenspan's Federal Reserve too Fed Funds to fight it. Interest rates were so much higher then. I also remember well the past two decades, when interest rates plunged. Inflation was very low, so rates dropped a lot in the early 2000s. They rose a bit, but then fell during the Great Recession. They were rising again until the pandemic hit. Many people, especially younger ones, feel like rates are very high right now, but they aren't in my view. The current inflation rate is near 4%, which is about what US Treasuries yield.

I think there are a lot of problems America faces, but the huge debt stands out with respect to my thinking about investments. We face a potential recession from either the tariffs or other reasons. In fact, in a lot of ways, we are in a recession. Think about the retailers that have gone away! The AI boom has been about making big investments for companies and about investors running up stocks, but AI hasn't yet changed the way the world works. It could!

America has some inflation now with no signs that it is going away, and it has very low unemployment. DOGE has been laying off government workers, and a weakening economy or uncertain times could yield higher unemployment.

Where Stocks Could Go

So, finally, the stock market is in or at the cusp of being in a bear market. The S&P 500, down 17%, falls a little short of the 20% pullback definition, but the large QQQ has dropped by more. Also, small-cap stocks, as measured by the Russell 2000 ETF (IWM), have dropped by more from its peak. Looking at these three indices since the end of 2022, IWM is up only 7% in total return. QQQ has gained 61.8% including dividends, while SPY has rallied 36.3%. Looking at the 5-year chart, they are up a lot:

So, the bull market was big, lasting a long time and going very high (new all-time highs for SPY and QQQ). Where could it go?

I shared some targets previously, and I continue to believe that stocks could fall a lot. Almost a year ago, I discussed how low stocks could go, and I suggested then that SPY, now at 505.28 and then at 495.16, could drop to 320-340. This would be above the lows from the pandemic but down 31.3-36.7% from here. Of course, it could fall more! Or, it might not fall!

Last week, I wrote negatively here about gold, which has been soaring. It dropped last week and could drop a lot more. I have also expressed concern about Financials. The Financial Select Sector SPDR Fund (XLF) dropped 10.2% last week but is down just 8.2% year-to-date, which is less of a decline than the overall market. It has declined 6% since I wrote about it negatively almost six months ago.

I have written favorably about REITs and Treasury Inflation-Protected Securities (TIPS), but I am worried now a bit about both. I updated on TIPS less than a month ago, and they have advanced. I still don't see any sort of buying frenzy, but iShares TIPS Bond ETF (TIP) has advanced by a bit. They are definitely not the worst things to own, but the low Treasury rates could hurt them if they were to move higher. Here is a chart of Pimco 15+ Year US TIPS Index ETF (LTPZ) compared to iShares 20+ Year Treasury Bond ETF (TLT) over the past six months:

For those concerned about inflation, TIPS continue to make a lot more sense than gold!

On the REITs, while I do own one currently (bought on 4/4) and am closely watching a few, they aren't down much in 2025. iShares US Real Estate ETF (IYR) has dropped 3.9% on a total return basis. I think the decline in interest rates has helped them, and this could reverse.

A Bounce?

I published a piece on Seeking Alpha today about why I am long IWM today. IWM has been underperforming SPY for some time now. It got hit very hard in 2020. In the past 9 years, it has returned 83.5% with dividends, while SPY has returned 184.4%. In the piece, I shared some technical reasons it could rally (from 181.19 to 203-211 perhaps). Also, if the Trump Administration were to drop the tariffs the market could rally. Here is the short-term chart of IWM that shows open gaps:

Of course, other things besides IWM could bounce, including perhaps the Magnificent 7, which would help QQQ and SPY.

My IRA has 14 long positions in stocks, and I am hoping that they bounce! There are several things that I look for when I am considering stock positions, including good valuation but also a technical situation that suggests a potential rally (like gaps down, distance below the 150-day moving average or an extended period of being in a downturn).

Conclusion

I have warned about the Magnificent 7 several times. I still worry about these stocks, which make up a large part of the indices. My article today is about the entire market being no so magnificent. While I remain very bearish, I do see the potential for higher prices in the very short-run.