I really liked the Four Tiers of Fear framework that is discussed in the first section of this edition of Market Factors. The second part of the newsletter details the rise of Ponzi corporate finance and the diversion posits a whole new world of technology access without smartphone or tablet screens.
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Equities
Fear tiers allow investors to estimate sell-offs
RBC Capital Markets head of U.S. equity strategist Lori Calvasina offered a useful template last week with Four Tiers of Fear in Modern US Equity Markets. Investors can use the format as a guide to how far markets will fall during any upcoming sell-offs.
The first Tier of Fear is the garden variety pullback. This involves a drop of between five and ten per cent for the S&P 500 and it’s the most common type of drawdown during the past three years. Ms. Calvasina writes that this is the “natural starting point for thinking about downside risk whenever a major source of uncertainty arises.”
Tier two is the growth scare, when investors endure a 14 to 20 per cent downdraft in the U.S. benchmark. There have been four of these since 2010 and in each case the market discounted a crisis or recession that never happened. The sell-off this year between February and April falls into this category.
Tier three is recession and war. On these unfortunate occasions the market declines by 27 to 32 per cent. The long history of U.S. recessions leaves a wide range of potential sell-offs – between 14 per cent and 57 per cent.
Recent war activity has caused consistent market declines of 20 to 25 per cent. This encompasses 9/11 and the subsequent war on terror, the two Persian Gulf wars and Russia’s invasion of the Ukraine. In the latter case, the S&P 500 fell 25 per cent.
Tier of Fear four is the calamitous major crisis. These involve painful equity market declines of roughly 50 per cent. Only three incidences in the past century qualify – World War II (equity benchmark fell 43 per cent), the tech bubble implosion (49 per cent) and the great financial crisis (57 per cent).
Ms. Calvasina’s template can provide valuable perspective for investors. Everyone gets a bit twitchy when the market falls off quickly but the characteristics of each of the four tiers potentially allow investors to predict the degree of the downside. For instance, if there is little or no risk of recession, the sell-off is almost certain to be a garden variety pullback and thus likely limited to 10 per cent downside. An actual recession implies that the benchmark may not stop falling until 30 per cent of its value has vaporized.
Investors should remember that the tiers are based on average results and there is significant potential variance in each of the four tiers. Nonetheless, to the extent to which the template motivates investors to examine the characteristics of any sell-off, it is a productive exercise.
Risks
Financial fragility everywhere
Analysis by University of Massachusetts economics professor Leila Davis identifies a sharp increase in “Ponzi companies” that could eventually derail equity markets and the U.S. economy.
Featured in a Bloomberg profile by Edward Harrison, Ms. Davis’ work categorizes all companies into three silos first developed by Hyman Minsky. The first and most financially healthy silo is called hedge, where cash flows cover the interest and principal on corporate debt.
The second silo is called speculative, and covers companies with cash flow covering interest payments but not sufficient to repay principal. The third silo is Ponzi – cash flow can’t cover the daily operation of the business, and new capital must be raised constantly. For Ponzi companies, the inability to raise capital at affordable rates leads to failure of the business.
Ms. Davis’ data indicate that the number of Ponzi companies as a percentage of the total sits right near the year 2000 highs at roughly one-third. Since 1970, the healthiest silo, hedge companies, have fallen from three quarters of all public firms to about 45 per cent.
Some of the Ponzi companies are earlier-stage technology companies that will be fabulously profitable in the future. Others are so financially fragile that if new tariffs raise the costs of production, they will be unable to continue. And there are a lot of them.
Samsung Galaxy S25 series smartphones are displayed at a Samsung store in Seoul on July 8, 2025.JUNG YEON-JE/AFP/Getty Images
Diversions
A future without smartphones
Collaborative Fund venture capitalist Sophie Bakalar envisioned “A future where our children will view screens the way most of us view cigarettes” - when phones, tablets and computers are invisible and technological user interfaces are hands free.
This future will require significant hardware development, voice recognition improvement and motion detection sensors much better than today’s.
I was stunned by this thought. Ms. Bakalar feels that screens are already starting to feel like anachronisms and while I’ve never had that thought before now I can’t shake the idea.
When Amazon Echo devices were first released in 2014, I thought I’d seen the future of computing. The promise of smart speakers was not realized but maybe I was on to the right idea.
The essentials
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Globe Investor highlights
What’s particularly curious about this bull market? How much the retail masses are piling on. Tim Shufelt explains. And on that theme, the New York Times did a deep dive into how a Reddit rallying cry helped amateur traders win in the market
Global markets are telling conflicting stories about the possible longer-term impact of U.S. tariffs on growth. And that means either stocks or bonds could see a steep correction once it’s clear which is right, reports Reuters.
Big rallies haven’t been kind to CAE shares in the past. David Berman suggests this time might be different
What’s up next
Tuesday sees the release of Canadian month-over-month manufacturing sales data for May, which is expected 1.3 per cent lower, and CPI for June, forecast to rise 0.2 per cent month over month. International security transactions for May will be reported on Thursday.
The Americans will also get CPI for June on Tuesday which is expected at 0.3 per cent month over month. Wednesday will see producer prices for June, forecasted at 0.2 per cent month over month. Industrial production for June is also out Wednesday and economists expect a 0.1 per cent increase month over month. Business inventories for May will be reported on Thursday when a flat reading month over month is forecast.
The U.S. earnings reporting calendar is busy starting with Blackrock Inc. ($10.879 per share expected), JP Morgan Chase & Co. ($4.474), Citi ($1.603), and Wells Fargo & Co. ($1.409) on Tuesday. Johnson & Johnson ($2.696) releases results Wednesday. Thursday has PepsiCo Inc. ($2.031) and Netflix Inc. ($7.074) and Verizon Communications Inc. ($1.189) reports next Monday.
See our full earnings and economic calendar here