The last couple days have officially been one of the worst market routs we've ever had. The S&P 500 has dropped 10% in two days--which has only happened three other times since the five-day trading week began in 1952, per Bespoke: in 1987 (Black Monday), in 2008, and in 2020. 

Not great company to be in. The financial crisis was awful and marred the economy for years. Covid saw GDP plunge 10% and the economy lost 22 million jobs. Are we careening into a similar calamity now? 

The short answer is, we don't know yet. But there are some key differences to point out. For starters, the 1987 market crash was not followed by a recession at all. It's not unprecedented for a stock-price collapse to have limited economic fallout.

The same was true when the dotcom bubble crashed in 2000. There was a mild, eight-month recession the following year, but it actually ended just two months after 9/11--another massive shock that was not followed by a deep economic downturn.  

What's interesting is to hear the Trump administration accept either outcome without panic. The Treasury Secretary likened this period to the early Reagan years, when the economy crashed as the Federal Reserve jacked up interest rates and the president embarked upon major supply-side reforms. 

Yes, as Secretary Bessent told Tucker Carlson while stocks were collapsing yesterday, Reagan went on to win re-election by a landslide in 1984. But Bessent was tacitly accepting the possibility of a deep recession as the cost of the administration's goals in the meantime. 

The "stock vigilantes," as Ed Yardeni likes to call them, are not happy about this. And they may not be done pushing stock prices lower, Yardeni warns, until the president pivots his strategy, faces pushback from Congress, or finds his tariff plans curtailed by the courts. 

And yet there are buyers. In fact--retail buyers, who on Thursday piled in by the most in a decade, according to J.P. Morgan, with nearly $5 billion of net buying. And some professional investors, like Steve Auth of Federated Hermes. "We are now close enough to begin legging into stocks," especially growth stocks which they have under-owned, he wrote yesterday. 

Here's the rub: Auth, Yardeni, and relatively sanguine economists like Stephen Stanley of Santander all expect the president to "gracefully pivot" by cutting deals to lower tariffs if the economy really starts tanking. But Bessent--whose vision includes lower deficits, lower interest rates, and more U.S. manufacturing--expects Trump to stay the course. 

Either way, both camps see stocks rebounding once the dust settles. "If history is any guide, equities are likely to be considerably higher by this time next year," wrote Auth.

The real question is how much further they have to fall first. And when they do ultimately rebound, is it because Trump backed down--thus reinforcing the status quo--or because the economy is emerging reformed, which may create a whole different set of winners and losers. 

See you on Sunday at 7 p.m. for our market special...

Kelly