by Jason Bodner
April 1, 2025
“Upon us all a little rain must fall.” – from Led Zeppelin’s The Rain Song.
April begins today, and there are songs about “April Showers” as well us Led Zeppelin’s rain song.
It’s true. Ask any investor. When corrections come, moods become as gloomy as a rainstorm.
For weeks, investors felt the storm clouds gather and rain come down. Most accounts sputtered lower. Some blamed President Trump’s tariff talks, while DOGE slashed jobs while cutting federal spending.
The pain is real, and some fear that a recession may be on the horizon.
Maybe those were just catalysts for sellers to sell. Avalanches sometimes start with a single snowflake. Other times it’s dynamite, but those are catalysts, in each case. What comes after is a different science.
Today, I will illustrate what caused this and other stock slides throughout history. Understanding this crucial, little-discussed topic will enlighten you and (hopefully) make you a better investor…
Americans borrow a ton of money for a lot of things. If you fit into that category, you’re not alone. According to one source, our household debt is north of $18- trillion dollars. That’s a lot of leverage.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
What caused this crunch is the fact that we just witnessed a classic case of deleveraging from the highest margin use on record, $937-billion, according to the Financial Industry Regulatory Authority (FINRA).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Big brokers that extended credit to clients suddenly had to adjust their macro-outlook downward to account for unforeseen tariffs, which posed a potential threat to global growth. When this shifted, the firm had to align. Extending credit is great in a steady bull market, but not so great when facing uncertainty.
I believe fund managers received friendly (or firm) margin calls – an order, not a plea, to reduce leverage.
Let’s back up a little. In the second quarter of 2024, there were an estimated 30,000 hedge-funds that managed a collective $5.13-trillion worldwide. I know of funds that run leverage as high is 250% of their asset value. Imagine a medium sized fund of $20-billion needing to take down a few billion dollars of leverage in just a few days. On the surface, an investment account of $20-billion is less than 4/10th of a percent of global hedge fund assets – one hedge fund in a sea of funds – but there are pension funds, asset managers, prop trading firms, and market makers. It is truly mind-boggling when you consider the scope of the market and all its participants – and we aren’t even talking about day-traders or retail investors.
Let’s look at some statistics that may strengthen my hypothesis.
I told you that record margin debt peaked in January at $937-trillion. Looking at February’s number, you will see that it already fell by 2% ($19-billion). The real liquidations took place in March, a number not yet released. I’d wager that when March’s statistics are released, we will see another drop in margin debt.
The torrent of stock selling was relentless for several weeks. Then, it suddenly stopped:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
March 13th was the last day of any notable selling, which might indicate that the accountants told the managers that margin calls needed to be wrapped up by middle of the month in March.
Now, let’s look at how tightly correlated margin debt is to market prices throughout history.
Starting in 1997, as the Internet Bubble swelled, so did leverage. Margin debt ballooned. Then the market ran out of steam and, as leverage had to come down, so did stock prices. Then 9/11 hit the market:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Next, we see the tight correlation between stock prices and margin debt during the Great Financial Crisis (2007-09). It is the same story: Greed went up, seeking return, so leverage went up. When the market cracked, brokers needed to cover their butts and called in their credit. This forced prices lower:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Here is where we are today:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Margin debt balances will certainly come down. It is also important to note that now does not compare to the Great Financial Crisis or The Internet Bubble. After all, look at the graph above – all the way on the left. That’s COVID-19. Look at the swift recovery and restocking of margin! I think we can all agree that anxiety over tariffs and some federal job losses cannot even come close in scope to what COVID caused.
This is a correction, but not just in the stock market. This is a correction of the use of credit to invest on margin. Leverage got too high. It would have continued, if not for a catalyst. That catalyst was Trump starting his tariff wars, and DOGE starting its war on waste. Those headlines spooked the markets and the analysts. The ones to blame here are really the brokers who extended credit, and the clients demanding it.
This is actually good and healthy for the market. One could argue that the true value of the S&P 500 rises when leverage falls. Look at the above chart inverted:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now looking back to 2000:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Last year, the S&P 500 rallied 25%. As a hedge-fund manager looking to beat the market, that’s hard to surpass. That’s why investment managers are incentivized to use leverage as they try to beat a runaway bull market. Brokers are happy to collect interest on their credit extended, just like credit card companies, but when the debts get too big for comfort, after the environment suddenly changes, they circle their wagons fast. Leveraged hedge-funds pay the price as they scramble to “reduce the gross” (leverage).
Investors like you and me look at the sour stock market and blame the headlines or the action of the catalysts. The fact is that it is not that simple… it is even simpler than that!
Greed drives the use of credit. The rug suddenly gets pulled out from underneath traders. Everyone must adjust simultaneously and they all rush for the exits. They don’t have a choice – forced selling caused it.
The good news is that this is cyclical. Like I said, margin debt will certainly be lower when March data is released. Stocks have already started stabilizing. Selling has vanished.
The time to buy great stocks on sale is now. Fear will subside. The economy will recover, and margin will once again drive stocks higher. It’s as predictable as the sun coming up (but always expect rain).
“Into each life some rain must fall” goes back a lot further than Led Zeppelin, in fact to Henry Wadsworth Longfellow’s poem “Rainy Day (1841), which formed the basis for a #1 hit recording by Ella Fitzgerald and the Ink Spots in 1944 – a good year to buy stocks, as it turns out.
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
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Sector Spotlight by Jason Bodner
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Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT
Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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