To The Moon

By Bo Pei，US Tiger Research

I didn’t write my Market Commentary for the first three days of this week—partly because I felt the timing wasn’t right yet (the $S&P 500(.SPX)$ hadn’t dropped 10%) and partly because I was taking time to think and analyze how this market downturn might play out.

To get straight to the point: in the short term, I believe this could be a good opportunity to buy the dip in U.S. equities, as the market is likely to see a rebound. However, the medium-term outlook (over the next few months) remains concerning.

Short-Term Outlook

Here’s why I think a short-term rebound is likely. First, let’s look at historical probabilities.

The $S&P 500(.SPX)$ has now declined 10% from its recent peak, a pullback on par with the yen carry trade unwind on August 5 last year. Meanwhile, the Nasdaq 100 has fallen 13%. Running a quantitative analysis, I found that over the past 20 years, the S&P 500 has experienced a first-time pullback of at least 10% from a recent high on 10 occasions (excluding the current instance). The calculation is based on intraday lows relative to previous highs. Notably, last August’s decline wasn’t included, as the peak-to-trough drawdown was only 9.7%.

The chart below shows the S&P 500’s performance in the 20 trading days following such events. As seen, the average return over the next five days is positive.

Source：US Tiger Securities

Breaking it down further:

• 5-day returns: Average return of +2.45%, median +2.42%, with a clear tendency for short-term rebounds. The standard deviation is 2.15%, meaning some downside risk remains (e.g., the worst case was -2.15%).

• 10-day returns: The average return is close to zero (+0.07%), indicating increased market divergence and uncertainty. However, the median remains positive (+2.83%), meaning more than half the cases saw gains. The standard deviation is 7.03%, suggesting high volatility, with a maximum gain of +6.30% and a maximum loss of -16.96%.

• 20-day returns: The average return is still slightly positive (+0.36%), but the median turns slightly negative (-0.77%), meaning more than half of the cases saw further declines. The standard deviation is 5.86%, with a max gain of +9.79% and a max loss of -8.86%, implying that risks are not fully cleared.

This suggests that after a sharp decline, markets tend to experience a short-term mean reversion bounce—9 out of 10 instances in the dataset saw a rebound within five days. The reasoning is straightforward: extreme market moves are often followed by reversions. However, beyond five days, the direction becomes more uncertain as fundamentals and events take over.

In addition, based on the current information, it is highly likely that the U.S. government will fail to pass a budget immediately tomorrow, leading to a government shutdown. Many investors may recall that historically, the stock market tends to decline before a government shutdown but often rebounds once the shutdown officially begins—essentially a "sell the news" reversal.

The chart below tracks the performance of the S&P 500 during the 10 most recent U.S. government shutdowns since 1979. On average, the S&P fell -3.37% in the 30 days leading up to a shutdown, but gained +0.79% during the shutdown itself. The most recent shutdown in late 2018, which also occurred during Trump’s presidency, saw the market drop -7.8% before the shutdown, only to rally +10.3% afterward. This suggests that government shutdowns aren’t necessarily bearish for stocks.

Source：US Tiger Securities

Of course, statistical patterns alone are not enough. Fundamentally, recent economic data has not been particularly surprising. While markets are pricing in recession risks, I still believe the probability of a recession in the first half of the year is below 25%. This gives the market some breathing room for a short-term rebound.

Moreover, the VIX is elevated (around 25), but the SKEW index is near a one-year low at 128.7. SKEW measures tail risk in the options market by tracking demand for far out-of-the-money put options. Unlike the VIX, which reflects overall expected volatility, SKEW specifically gauges concerns about extreme downside risk. A low SKEW reading suggests that the market does not foresee significant tail risk, even though implied volatility remains high. This setup implies that as long as there are no major surprises, a decline in VIX could gradually push stocks higher.

Source：TradingView

One risk, however, is that the VIX has risen in a gradual manner rather than spiking suddenly. In past market crashes, the VIX surged sharply, triggering forced liquidations in short volatility positions, which ultimately flushed out risk and set the stage for a recovery. This time, however, the slow grind higher means that volatility positions haven’t been fully cleared. If an unexpected event (a "black swan") were to occur now, it could trigger a final sharp selloff before the market truly stabilizes.

Overall, I expect a short-term rebound but don’t think it will last long.

Medium-Term Outlook

The medium-term picture remains concerning. Even after a 10% correction, U.S. stock valuations are still elevated. If the market continues to price in recession risks, the current pullback is far from sufficient.

Another theory circulating in markets right now is that the Trump administration may be deliberately engineering a mild recession this year. The reasoning is that given today’s high valuations, a bear market is likely to occur at least once during Trump's four-year term. If a bear market is inevitable, it would be politically advantageous for it to happen earlier rather than later, allowing time for a recovery before the next election. A downturn early in the term could be blamed on Biden, whereas a selloff closer to 2028 would be politically riskier.

Another rationale for a controlled slowdown is that a mild recession could create a short-term negative wealth effect, cooling down consumer spending and economic activity, which in turn forces the Fed to cut rates sooner, helping to avoid a severe economic downturn. Moreover, the easiest way to reduce the federal deficit is through lower interest rates.

For context, the U.S. government’s interest payments in FY2024 reached nearly $1 trillion, a staggering 34% increase YoY, accounting for 14% of total government spending—exceeding even the defense budget. Meanwhile, the fiscal deficit stands at $1.83 trillion, meaning interest payments alone are over 50% of the deficit. In other words, Trump’s fiscal tightening efforts over the next four years may not achieve as much deficit reduction as a single 1% rate cut by the Fed.

For these reasons, I believe the likelihood of a mild recession later this year is rising. Since markets are forward-looking, this means equities could remain under pressure in Q2.

This aligns with the outlook I laid out back in November 2023:

“

1. Include some interest expense reductions within the $500 billion cut, minimizing GDP impact while helping offset tariff and immigration-related inflation.

2. Use tax cuts and deregulation to counterbalance the reduction in fiscal spending.

3. Economic slowdown would cool the labor market, reduce inflation pressures, and push the Fed to accelerate rate cuts, potentially ending QT or initiating QE to curb long-term yields.

4. Lower rates would, in turn, reduce interest expenses, creating a positive feedback loop. Falling rates could partially offset the GDP impact of reduced fiscal spending, ultimately facilitating a soft landing.

”

The key question now is whether Trump’s administration will push too hard and trigger a more severe downturn rather than a mild recession.

A tool to boost your purchasing power and trading ideas with CashBoost!

Open a CBA today and enjoy access to a trading limit of up to SGD 20,000 with upcoming 0-commission, unlimited trading on SG, HK, and US stocks, as well as ETFs. Find out more here.

Other helpful links:

• 💰Join the TB Contra Telegram Group to Get $10 Trading Vouchers Now🎉

• How to open a CBA.

• How to link your CDP account.

• Other FAQs on CBA.

• Cash Boost Account Website.