Panic-Selling? Or the Start of Something Worse...

It’s been a tough week, with panic-selling among top stocks…

But will the pain continue? Or are we merely looking at an overdue correction?

My take below:

Welcome to Moneyball Economics. I’m Andrew Zatlin.

I’ve been advising you for months and months that Donald Trump is going to create a lot of volatility in the markets, and you need to play this volatility.

Maybe that’s having your favorite stocks, selling them on the rips, buying them on the dips.

Maybe it’s a simple strategy with options where you’ve got a straddle that uses puts and calls, and so anytime the market swings up or down, you’re making money.

Whatever the case, we are now definitely in selloff mode. In fact, I think we’ve stepped into panic selloff.

I think margin calls are underway, so I don’t think the current dip is over, but I do suggest you buy the dip, maybe limp in next week.

But why? What’s going on?

As always, the answer comes from looking at what’s going on in the economy and expectations thereof.

A lot of people take a shortcut and they say, look at the technicals. Look at the valuations. But valuations are ultimately sort of a code for what’s going on in the economy. In fact, let’s start with valuations, because we are now out of earning season.

We have completed earning season for the fourth quarter. What happened? Is there anything in there that can inform us about what we can expect downstream? As far as I’m concerned, earnings season was pretty darn good. Any metric you want to throw on the table was really historically sound.

For example, you want to talk about the s&p 500 … how many companies beat earnings estimates? 77% beat expectations. That’s about where we are historically. Or how about this revenue growth in the fourth quarter was 5.2%, and that was the highest we saw all year long and on and on.

We can throw any number of figures out there, any metrics out there … the key point here is the fourth quarter results were pretty solid.

And yet in case you didn’t notice this, the market was really difficult to deal with. Anytime there was a miss, the company got crushed, and even when the company beat the market was pretty stingy with the payoff. In fact, sometimes there was no payoff. Like with Nvidia. Nvidia comes in and they beat across the board, and what happens stock’s down almost 10% and what’s going on here? Is it a valuation thing?

We’ll come back to that valuation code economy in a second. But suffice it to say, Nvidia did really well. In fact, if you want to talk valuation, they just generated $3 of earnings for the year versus today’s stock price $120. So that’s pretty reasonable. That’s in that 40 P to E zone that high tech companies tend to get.

And in fact, if you want to look out one year, they’re expected to generate $5 of earnings, which means today you’re talking a 24 P/E forward when their growth is in the 50% zone. This is ridiculous. This is oversold/undervalued zone unless that earnings growth isn’t going to happen.

Maybe that’s why Warren Buffett announced that he’s got twice as much cash on the sidelines. He expects valuations to come down. Is that because he also expects the economy to slow down or is he just looking at that valuation saying, where can it go from here? Historically, the P/E for the s&p 500 spend about 18, 19, and right now it’s at 22.

So does the market, do the companies grow their way out of this? Does the economy? As I said, all roads lead back to the economy from a valuation perspective.

If that “e” in p/e (earnings) grows, it’s because the economy’s growing, right? Well, is the economy going to grow its way out of this overvalued situation?

That’s the connection between Buffet and between Nvidia getting smacked around.

Until this week, I would’ve told you that I believe in nothing but economic growth this year, and I still do eventually. But I’m starting to look at the way Trump is moving, the rashness and the pace with which he’s moving the scale with which he’s moving, and it’s telling me that in fact, he could trigger a recession with these moves. Let me explain…

Trump has frontloaded all the pain, the premise or the promise, whichever one you want to consider, is that there’s going to be a big payoff that by cleaning up, by making the government more lean, by getting rid of waste, we’re going to throw out a lot more money and demand less of taxpayers, which translates into more money in the taxpayer’s pockets.

The economy’s going to become more vibrant. We kick out workers, we create job growth, blah, blah, blah, blah. He may be right, absolutely. But the problem that I face is in the timing right now. There’s obvious economic pain that he’s creating by firing hundreds of thousands of workers who are either direct federal government workers or contractors, reducing government spending immediately in the tens of billions, if not hundreds of billions of dollars.

For example, there’s no travel. Federal government workers can’t use their federal credit cards. Everyone’s been told to freeze hiring, freeze everything, freeze, freeze, freeze. That’s a problem when you’ve got $4 trillion of money being pumped into the broader economy, we are seeing a huge hit right now.

So where’s the payoff? Well, if there’s a payoff, it’s in the future, right? All these gyrations ultimately lead to leaner and meaner companies, but that’s a future payoff.

“Pain today, love tomorrow.”

Yeah … but there’s pain today.

Nvidia says they’re going to hit $5 of earnings. What if they don’t?

In that case, they’re not oversold, they’re not undervalued, and that I think is the issue that Wall Street’s grappling with … where is the economy going and how much damage is Trump going to do versus how much growth he’s going to generate?

I believe looking at the way he and Musk are moving, the speed, the scale, and quite frankly, they’re not going as surgically as I’d like. They’re going pretty much just blitzkrieg out there. I think they’re going to cause more damage upfront. I think the second quarter is going to be incredibly problematic.

Are we talking recession? I don’t know. Are we talking stagflation where there’s inflation but not much growth? Probably. It’s a shift in my view. To be honest, I am concerned.

I need to see a little bit more from Trump about the payoff promise. I’m not seeing it right now, and I think companies are in the same boat. They’re not seeing it yet. They’re seeing just a lot of problems. The tariffs, for example. As a result, I’m watching out.

Having said that, okay, here’s the punchline…

Economic data’s coming in and it’s strong, incredibly strong. In fact, when payrolls come out, there’s going to be a huge surprise upside to payrolls indicating economic strength. We are seeing a lot of confusing economic data, folks, that is going to create volatility. So embrace the volatility, play the volatility. You can make money on the volatility.

We’re in it to win. It Zatlin out.