It’s something else when global indexes plunge by double-digit amounts in just two or three days
For those of you thinking the worst is behind us—bad news bears all around. Monday’s session brought more pain, with the Dow Jones Industrial Average shedding over 400 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’s rout, the pressure clearly isn’t letting up.
Good news, though—if 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—nothing more, nothing less. While a lot of people are quick to point fingers and assign blame, this is how markets work—they go up, and they go down.
A lot of people have been reaching out and asking for the “why” behind the situation, so I’m going to try and break it down for everyone.
A lot of what we’re seeing in the markets—whether it’s stocks, bonds, or commodities—can be broken down into two main categories. I’m going to walk through both, give you a bit of background, and explain why the markets are reacting the way they are. This isn’t meant to be all-encompassing, but rather a general breakdown to help you settle clients.
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.
Globalism, tariffs, and why Apple’s in the crosshairs
First and foremost, we are seeing a reaction to what the markets are viewing as a negative for economic performance.
A lot of economics over the past 40 years has been based on global trade—what’s commonly referred to as globalism. Globalism is the reason you can buy all your stuff at the dollar store for cheap.
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.
Since stock markets are a forward indicator, they always “bake in” an earnings multiple to profits to arrive at a stock price. I’ll give you an example—and I’m going to pick on Apple.
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—around 2%.
Apple’s 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’s stock. Multiply that across other big tech names, and you see how tariffs are pulling indexes lower.
Now, I’m not saying Apple’s profits will fall by $1.00 per share—I’m 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—Microsoft, Nvidia, Apple, Meta, Google—are also the most exposed to tariffs because of where they source their products and labour.
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’t anything to panic about—it’s just Mr. Market doing what Mr. Market does: repricing stocks based on all available info. And keep in mind, if tariffs are reversed—let’s be honest, the only predictable thing about DJT is that he’s unpredictable—Mr. Market could just as easily reprice stocks sharply higher.
Margin calls: the silent accelerant behind the selloff
The second reason we’re 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 “lever up” your position.
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.
So, in a $10,000 stock portfolio, there is $2,500 of your own money, and $7,500 of the bank’s money.
The problem with this strategy shows up when there are large moves in a short period of time. I’m going to pick on Tesla here—not because I don’t like Elon, but because it tends to be a volatile stock.
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’ve owned around 23.4 shares. Today, Tesla trades at about $239.43—a drop of $187.07 per share, or roughly 43.8%.
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.
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—a process called “margin selling.”
When the bank margins you out, they simply sell at the current market price—much 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.
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.
Margin sellers are forced sellers—they don’t 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’t renew.
They’re unemployed, have zero equity, and bad credit—so you can’t 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.
These two factors are driving the massive moves we’re seeing. Markets are re-pricing company profits and future global growth, while margin clients are being forced to sell into already falling markets—pushing prices even lower.
Also worth noting is that large institutional buyers—like pension funds and mutual funds—are on what we call a buyer’s strike. No one wants to catch a falling knife, so they’re 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.
Why bonds and gold didn’t come to the rescue
A lot of people are asking why bonds and precious metals didn’t offer more protection during all this—especially since these two areas are usually considered safe havens during stock market chaos.
Of particular interest to mortgage brokers are the bonds. We saw the Canada 5s drop about 12 basis points over the week—not much, considering the stock market fell by double digits.
Bonds (and gold) have performed well this year, but when investors are losing money hand over fist, they tend to sell their winners first—sometimes to keep margin onside. Since bonds and gold were the big winners, they were among the first to be sold.
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—so yields didn’t drop as much as you might expect.
We also have to remember that if we’re 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’s hard to find safety in bonds—or expect yields to fall—when the market’s unraveling due to an inflation-driven event.
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—that was probably one of the worst employment reports I’ve seen in a very long time.
What comes next: bargain hunters, reversals, and rising yields
If we see a lot more selling in equities after Monday or Tuesday, we might get a buyer’s bid in bonds, which would push prices up and yields down. But if the selling fizzles out by then, bonds likely won’t see much action.
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’re 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—or a sharp drop—in bonds.
Bond markets aren’t stupid—they’ve 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’t push yields down more than 12 bps. That tells me there’s probably room for yields to move higher once we get past this stock market hiccup.
This is an abbreviated version of an article originally posted for subscribers of MortgageRamblings.com. Those interested can subscribe by clicking here. Opinion pieces and the views expressed within are those of respective contributors and do not represent the views of the publisher and its affiliates.
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Last modified: April 7, 2025
