1. The U.S. equity market sold off in March. The catalyst was the surprise announcement by the Trump Administration of 25% tariffs on Mexico and Canada. Tariffs have negative implications for global economic growth, goods prices, and corporate profit margins.
2. The global equity markets cracked in early April when the Trump Administration surprised again by announcing tariffs on almost every nation, with some nations facing very high tariffs.
3. The reduction in leverage was a contributing factor to the sell-off.
Hedge funds increased financial leverage by approximately 100% over a two-year period. Margin loans in brokerage accounts rose 47% over a fifteen-month period. Rapid rises in financial leverage are often followed by a rapid deleveraging if an event triggers risky asset price declines, a sharp rise in volatility spikes, and an increase in asset correlations.
4. High valuation multiples made the U.S. equity market especially vulnerable.
The U.S. equity market started the year with high absolute valuation multiples, near the historic highs of the Internet Bubble of 2000. On a relative basis, U.S. equities also exhibited the largest historical valuation gap to emerging markets equities and non-developed markets equities.
