April 4, 2025
Freefall: Reflections on a Market Rout
When I mentioned in a blog post yesterday that more stock market volatility is undoubtedly on the way, I certainly did not envision a market rout of the scale that we experienced yesterday. As a student of finance (I have a Master’s degree in finance, believe it or not), I would have thought that the markets had already priced in the risks from tariffs to a great extent, given that trade policy was a major plank of President Trump’s campaign platform and he had in fact already imposed significant tariffs against major trading partners (not just remote islands where the only inhabitants are penguins). But unfortunately, markets do not operate with the ruthless efficiency that was touted in my finance textbooks and are instead fragile creatures susceptible to overreaction and panic when reality bites. The major stock indexes experienced their worst day since the depths of the pandemic in 2020, with the Dow Jones Industrial Average down 4% and the Nasdaq Composite down 6%. Strangely, we did not see the usual announcement from the SEC that is posted during market freefalls in which the agency assures use that it is closely monitoring markets.
I don’t know about you, but I have very distinct memories of the stock market routs that I have experienced over the course of my adult life. I was in college when the infamous “Black Monday” crash occurred on October 19, 1987. It was cataclysmic in its scale, with the Dow Jones Industrial Average dropping 22.6% in a single trading session, representing the largest stock market rout since the Great Depression. Next up was the bursting of the dot.com bubble in the early 2000s, which was much more of a prolonged form of torture. I was in private practice at the time and wondering where my next deal was going to come from, but then the corporate scandals came along and I was very busy for the next couple of years. And then of course there was the 2008 financial crisis, which prompted a prolonged market collapse where the Dow Jones Industrial Average fell by 53 percent between October 2007 and March 2009, as we all teetered on the edge of the economic equivalent of “nuclear winter.” In more recent memory, we experienced the terrifying market descents that arrived with the realization of the scope and impact of the COVID-19 pandemic and the measures taken to prevent the spread of the disease, which at the time seemed like something approaching “end of days.” In all of these cases, the markets eventually dusted themselves off and got back up to continue their ascent. Sometimes it took only a few days, and sometimes it took years. Let’s hope that this time we are in the “only a few days” category.
In the meantime, public companies of all shapes and sizes are scrambling to come up with a game plan for addressing the new market and economic environment that is brought about by the shift in global trade policy. Here are five key considerations from my perspective:
1. The impact of the tariffs, including the potential for supply chain disruptions and the closing of existing global markets, should be assessed quickly so that the uncertainty can be addressed in upcoming earnings releases, earnings calls and SEC filings. For some companies, it may be necessary to accelerate the earnings process or schedule ad hoc presentations to address investor concerns as quickly as possible. In the meantime, companies should be cognizant of Regulation FD when communicating with investors and analysts who are seeking immediate answers through one-on-one communications. Many companies will likely need to revisit their earnings guidance for the year, and those revisions will need to be addressed quickly in upcoming earnings communications. In prior periods of significant economic uncertainty (such as during the COVID-19 pandemic), many companies were forced to suspend or discontinue their guidance, given the difficulty in forecasting future performance.
2. Companies are obligated to address in the MD&A “known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations” and “known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the registrant’s liquidity increasing or decreasing in any material way.” I would say that these tariff actions fall squarely in the “known trends and uncertainties” category, so even though they go into effect in the current quarter, companies will need to address the impact of the tariffs and the other potential collateral consequences in SEC filings covering the recently ended quarter. Disclosures in SEC filings should be closely aligned with the messaging in the company’s earnings release and earnings call and any other public statements on the topic.
3. Companies will need to carefully assess their liquidity and capital needs in light of the potential for continued volatility in the markets, the potential impact of the global trade situation and the prospect of an economic recession. There may be opportunities to advantageously access the debt capital markets or lending markets as interest rates continue to decline. As we last saw with the COVID-19 pandemic, when faced with significant uncertainty, companies often shift into a cash preservation mode, and thereby delay or abandon plans for major capital expenditures, acquisitions, etc.
4. Many companies will inevitably consider ways to prop up their stock price, given the profound market drop that we experienced yesterday. During the early days of the COVID-19 pandemic, share repurchase programs proliferated as companies sought to stem the tide of stock price declines. A significant challenge for companies at this particular point in time is that they are likely in possession of material nonpublic information about their completed fiscal quarter (and potentially the impact of the new tariffs), so unless they had put a Rule 10b5-1 plan in place prior coming into possession of that information, such companies will not be able to enter the market to repurchase their own securities pursuant to a pre-existing share repurchase program or under a newly-established program until the material nonpublic information is disclosed. Those companies that do not currently have a share repurchase program in place may wish to get the board to approve one, so that it could be announced when the company releases its earnings. In evaluating whether to repurchase shares in an effort to support the company’s stock price, companies should carefully consider their liquidity needs and whether the cash directed toward share repurchases is better preserved or directed elsewhere during this time of significant uncertainty.
5. A prolonged decline in stock prices and uncertainty about the ability to meet financial objectives due to external factors can wreak havoc on equity and incentive compensation programs. Companies will inevitably struggle with how to properly incentive their executives and employees during the course of turbulent market and economic conditions. In my opinion, companies should resist the urge to consider option repricings, for all of the reasons that I lay out in the ariticle “Option Repricing: Are You That Deparate?” in the May-June 2022 issue of The Corporate Executive. Similarly, companies should think twice about “moonshot awards” as a means to retain executives, as a I discuss in the articles “To the Moon and Back: A Reflection on ‘Moonshot Awards’” in the July-August 2022 issue of The Corporate Executive and “Houston, We Have a Problem: When ‘Moonshot’ Awards Come Back to Earth” in the May-June 2024 issue of The Corporate Executive. Depending on how all of this plays out, companies may need to revisit their incentive compensation programs so that they can continue to retain talent during tough times, often in ways that prove to be unpopular with the proxy advisory firms and institutional investors. Finally, companies should be monitoring any situations where executives have pledged a significant amount of their stock. As you may recall, during and after the financial crisis, the stock market rout triggered forced sales of company securities for executive officers and directors of public companies, resulting in high-profile meltdowns at some major companies. For more on this topic, check out my article “Hedging and Pledging Revisited in Volatile Markets” in the May-June 2022 issue of The Corporate Executive.
– Dave Lynn
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