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What do you think of the recent weakness in NVIDIA stock?
We'll get to NVIDIA later in this Q&A, but first let's look at some recent macro data, which we believe is relevant for NVIDIA and the overall market.
Real retail sales (i.e, after inflation) fell -0.7% in June, according to the official government report. As shown below, this key measure of consumer spending has been flattish or declining for over two years. Real retail sales typically only decline in a recession. Despite what Jay “Transitory Inflation” Powell says, this is not a sign of a “strong” economy.
But it is even worse than that. There was a significant seasonal adjustment factor that helped the official reported number. On an unadjusted basis, real retail sales fell 2.8%, the biggest decline in over a year, as shown below.
Source: ZeroHedge
This is why government statistics, especially about the economy in an election year, cannot be trusted.
Another sign of how stressed consumers are, which is consistent with a coming recession, is consumer expectations of real income gains over the coming five years. As shown in the chart below, consumer real income expectations have never been this low in the past 30 years, including during the Tech Bust of the early 2000s and the Great Recession of 2008-2009. This is truly remarkable and helps explain why many Americans are so unhappy with the current political establishment.
But What About The Market?
That’s all very interesting, but how come the market has been hitting new highs despite the weak retail sales and consumer expectations, you may be asking.
One word: NVIDIA.
As this chart shows, NVIDIA and AI mania on the part of investors has driven a 29% increase in Tech stocks this year. But without NVIDIA, Tech is only up 15%. Thus, this one stock has driven half of the increase in the Tech sector this year. Amazing and unprecedented, as far as we know.
Source: Trahan Macro Research
NVIDIA fell nearly 70% from November 2021 to October 2022 due to investor concerns over high inflation and rising interest rates. Then it increased an incredible 1200% until June 20, as inflation moderated and AI demand increased, although interest rates remain much higher. It since fallen over 15%.
While no one can say for sure if this is just a modest pullback in a long bull market uptrend for NVIDIA, given the fundamental signs of a recession and the concerning technical signs below, it could be the beginning of a significant downtrend, which would likely bring the rest of the market with it.
The weekly price chart below shows NVIDIA has recently broken a minor trend line, it is starting to underperform the S&P 500, it modestly broke below its recent On Balance Volume trend line, weekly price momentum is turning negative, it was recently very overbought and price is turning down. These are not bullish signs in the near-term, especially with the stock trading at a rich 44x forward earnings and 25x forward sales estimates.
Investment Implications
Consumers are clearly unhappy and not spending at a healthy pace right now. Imagine what will happen as unemployment continues to increase, which always happens after aggressive Fed rate hikes, such as those of the past two years.
Given that, the recent weakness in market bellwether NVIDIA is concerning. We are only human and cannot predict the future, but so far this is not a pretty picture.
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