CISCO 1990 – 2002, NVIDIA 2014 – 2025
In the real world, companies are focusing on tariffs. And they are giving up on forecasting future profits because ‘they just don’t know’, as the Wall Street Journal reports:
“Trade-War Uncertainty Prompts Wave of Companies to Yank Forecasts. New poll shows more than 80% of senior executives are worried about tariffs and other policy shifts.”
Against this reality, April saw the “largest monthly inflow” of retail stock buying at $40bn. This is a major red flag for experienced investors, as history shows:
“The public buys the most at the tops, and the least at the bottom”.
The chart shows the relative performance of today’s stock market darling, Nvidia, versus that of Cisco – the darling of the dotcom bubble:
- Cisco peaked at the top of the bubble in 2000
- It then fell 88% before it bottomed
- Nvidia may be following the same pattern
- So far, it is “only” down 21% from its peak, but may have much further to go
OUR pH REPORT SENTIMENT INDICATOR SUGGESTS FURTHER FALLS AHEAD
S&P 500 v pH REPORT SENTIMENT INDEX, 2002 – 2025
Index moved forward 3 months v S&P 500
Sentiment is a key factor in markets. And it can provide a valuable insight into the outlook, as The pH Report Sentiment Index confirms. The report has a good track record and focuses on two aspects of confidence: what people think about the market, and how many stocks are doing well
If people are bullish and most stocks are rising, that is usually a sign that good times lie ahead.
But that is not the case today. Yes, retail investors are busy buying the Magnificent 7 – Nvidia, Tesla, Microsoft, Apple, Meta, Amazon and Alphabet. But most stocks are well below their peaks.
MARGIN DEBT IS DRIVING THE RALLY
The reason for today’s rally is no secret, of course.
The Federal Reserve has been pumping vast amounts of stimulus into the market to support asset prices – both houses and stocks:
- There is an almost perfect correlation between margin debt and S&P 500 performance, as the chart shows
- The R-squared correlation is 0.89 since 1970 – as near-perfect as one could expect on a month by month basis
The question is if/when the speculators will give up believing that “stocks can only go up“?
CONSUMERS ARE FEELING VERY BAD ABOUT THE ECONOMY
UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT
QUARTERLY REPORT, 1952 – 2025 (Q1)
The stock market and the real economy seem to be living in parallel universes.
Retail investors remain very confident. But in the real economy, the University of Michigan’s Consumer Sentiment survey is also very weak, as the chart shows:
- The survey has been running since 1952, and is close to its all-time low of 57.6
- It has declined from 78.4 in Q3 to 64.5 in Q1, suggesting consumers are cautious
Consumption is 70% of the US economy, so a slowdown will be bad news for most companies. They will likely see their earnings fall.
WHAT HAPPENS TO THE TARIFF WAR IS KEY TO THE OUTLOOK
President Trump’s Tariff War will soon lead to empty shelves at Walmart, Target, Home Depot and many other stores this month, as discussed last week. There are two basic options ahead, and one subset:
- Most major countries, including China, quickly accept President Trump’s demands for new trading relationships
- Most major economies don’t accept his demands and a major Tariff War begins
– Most major economies don’t accept his demands and a major Tariff War begins
The risk, of course, is that no agreements are reached and Trump carries on regardless.
Charles Kindleberger’s chart shows how this policy played out in the 1930s, and led to the Great Depression.
The famous saying “Sell in May and go away” might be a prudent policy for investors.