Last week, the asset market experienced another roller coaster-like volatility, but with various technical indicators (such as the CBOE put-call ratio rising to the highest level since last summer) showing extreme oversold conditions, the market saw a decent rebound on Thursday/Friday. In the absence of new tariffs or geopolitical news, the risk of a government shutdown in the US being resolved, and US stocks being in an extremely oversold state, this provided the momentum for the market to rebound more than 2% last Friday, although trading volume remained relatively low.
According to a Bloomberg report, due to the prevalence of automated trading systems and strict risk control mechanisms, the SPX index fell more than 10% from its recent high in just 16 days, and with technological advancements, the speed of market corrections is getting faster and faster, with the last 3 major sell-offs (2018, 2020 and 2025) being among the most abrupt corrections on record.
In contrast, the market's recovery often takes much longer, as modern fund managers are subject to strict risk control constraints. The 10% drop in the SPX in 2018 only took two weeks, but it took nearly 4.5 months to fully recoup the losses. Bloomberg points out that in the past 24 instances of the market falling more than 10%, the average recovery time was about 8 months, reflecting the market's typical "slow rise, rapid fall" pattern.
According to data from JPMorgan, in the past 12 US economic recessions, the average decline in the US stock market from peak to trough was around 30%, while the current SPX adjustment is only 9.5%. A simple calculation suggests that the market currently implies a recession probability of around 33%, while the commodity and US bond markets imply a probability close to 50%, while the credit market implies a recession probability of only 10%.
Although the market is still struggling to find its footing, Wall Street economists have already responded in advance, with Goldman Sachs becoming the first major investment bank to significantly lower its US 2025 GDP growth forecast, cutting it from 2.4% to 1.7%, and citing that "the main reason for the downgrade is a more adverse assumption about trade policy" due to the increasing impact of tariffs. At the same time, JPMorgan has raised the probability of a US recession to 40%, and pointed out that its "exorbitant privilege" of relying on low financing rates, high capital flows and attractive US dollar assets to support its rising fiscal deficit is facing risks.
Furthermore, as the Democratic Party has almost completely capitulated to Trump in the government shutdown negotiations, this has paved the way for Doge, allowing it to continue its aggressive cost-cutting actions at least until September.
The data shows that retail investors have not yet responded in advance to the economic slowdown. US stock ETFs have seen net inflows almost every day since the market peaked in February, and the holdings of growth ETFs (such as Nvidia) have rebounded to near historical highs.
Meanwhile, although the futures long positions have declined somewhat, they are still relatively high compared to historical levels. In addition, the short positions on the SPX and Nasdaq remain at low levels, indicating a lack of short-selling pressure in the market.
The market believes that this sell-off was mainly driven by "multi-strategy" hedge funds that dominate the entire macro trading market. The Wall Street Journal reported that top hedge funds (such as Millennium, Point 72, and Citadel) experienced rare multi-standard deviation drawdowns and stop-losses in their performance in February and March, which is extremely rare in their long trading history.
"The market continued to be volatile on Tuesday. Goldman Sachs sent a report to clients stating that stock-picking hedge funds just experienced their worst 14-day performance since May 2022. The Millennium fund fell 1.3% in February and has fallen 1.4% in the first 6 days of March, with its two teams focused on index rebalancing having lost about $900 million so far this year." - WSJ
JPMorgan's data further supports this view, showing that the equity exposure of quantitative hedge funds has declined significantly, with long-short equity strategies focused on growth and momentum being hit hard, and funds tracking the stocks most favored by hedge funds underperforming the SPX by about 10% over the past month.
Unfortunately, the pain in the market is not limited to the public markets, as investment banking activities have also been severely impacted, with M&A activity slowing to the worst level in more than 20 years due to the uncertainty around tariffs.
"According to Dealogic data, US M&A activity in the first two months of this year hit the lowest level in more than 20 years, with only 1,172 deals worth $226.8 billion completed as of last Friday. Compared to the same period last year, both deal volume and deal value declined by about a third, marking the slowest start to a year since 2003." - Reuters
On the other hand, apart from gold, (short-term) fixed income is another major beneficiary of this economic growth scare. The futures market has repriced again, forecasting more than 2 rate cuts by the end of the year, with overnight rates expected to fall to around 3.5% by the end of next year.
Undoubtedly, the continuous quantitative tightening and withdrawal of liquidity by central banks around the world, coupled with market concerns about the US fiscal deficit, have led to a large short position in the US bond market, both of which have further driven the recent rebound in the bond market.
Compared to the historical average, the valuation of stocks other than the major large-cap stocks is still relatively under control, and the performance of hard economic data may be better than the rapidly deteriorating soft data, so the market generally believes that this is still a "buy on dips" market as we deal with tariff uncertainties.
In the cryptocurrency sector, market sentiment remains depressed, with BTC price hovering around $80K after the disappointing US government strategic reserve plan, but altcoins performed better last Friday as market risk sentiment improved, with Solana (SOL), Chainlink (LINK) and XRP gaining around 10% in the past week.
BTC ETF saw record outflows last week, and the market seems to be entering a consolidation phase in the short term, with traders starting to hedge downside risks through put options.
Due to the impact on market sentiment, listed BTC mining companies have started to turn to the debt market to meet their capital expenditure financing needs. As long as the financing channels remain open, the miners should be able to maintain operations without the need for large-scale BTC sales, thereby controlling the selling pressure in the market, but this area is still worth close attention. Currently, MSTR's net asset value premium is around 1.8x, and the weighted average BTC holding cost is around $67K, which still has a 15-20% price buffer compared to the current market price.
Despite the rebound in risk markets, ETH remains weak, with the weekly decline widening to 5% again, underperforming BTC by about 10% over the same period. The BTC/ETH ratio fell to 0.023, a level not seen since 2021 when the BTC spot price was only around $35K.
Factors such as the depressed market sentiment, stop-loss pressure, lack of new narrative drivers, and unresolved issues around Layer 2 value distribution continue to weigh on ETH's performance. According to CoinGecko data, the total market cap of stablecoins ($2.36 trillion) has surpassed that of ETH ($2.26 trillion), as well as the total market cap of all ERC 20 tokens ($2.55 trillion). Furthermore, this is the first time in ETH's history that it has seen negative returns in the first three months of the new year, with the price down nearly 48% year-to-date, and only less than 50% of active wallet addresses in profit, with widespread losses.
Unfortunately, given the structural issues in the Ethereum ecosystem, it is difficult to expect the price to rebound quickly, and there are currently no signs that the Ethereum Foundation will make any major strategic adjustments.
As the saying goes in the market: "Keep hitting until morale improves" - a reminder to everyone to stay vigilant!
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