This website offers three (3) user-driven Question & Answer features. One is exclusively focused on questions related to our flagship newsletter product and only for subscribers. The FAQ (Frequently Asked Questions) feature also available in the Education menu is mostly for website use and general customer service questions. But THIS one is for ALL followers -- subscribers or not -- and is focused on investor-driven educational topics.
Our followers ask questions. We differ from many competitors by LISTENING and trying to answer up to every question. Sometimes the answers are better suited for delivery in an existing or future special report, webinar of investing insight topic. Sometimes the questions better fit in one of the other Q&A features. However, when we are asked a question that -- if answered well (which is the only way we do it) -- will be of interest to our followers as a whole, it very well may be posted here as soon as we can. Below find a batch of recently-asked questions and well-developed, all-original answers. Click the question bar to reveal the answer. Click another question bar to close one question and open another.
Can NVIDIA and AI prevent a bear market?
Investor mania about some new technology is a characteristic of every bull market peak at unsustainably high stock market valuations.
In the 1920s, the new technology of radio caught the imaginations of investors. For example, RCA stock increased from $1 in 1921 to $573 in 1929. Then it fell over 95% during the Great Depression. In the 1960s, electronics were all rage during the “space age”. That was followed by the stagflation of the 1970s, which resulted in the worst stock market returns since the 1930s.
In the late 1990s, the emergence of the Internet drove investors to bid up stocks to the highest valuation levels in history (prior to the new all-time highs of 2021). It all came crashing down during the dot-com Tech Bust of the early 2000s — after the Fed raised rates, slowed money supply growth and inverted the yield curve.
Artificial Intelligence IS Revolutionary, But…
The current investor mania is artificial intelligence (AI) and NVIDIA is the go-to AI stock. We believe semiconductor company NVIDIA is one of the best and most technologically innovative companies on the planet. We also believe AI is an incredibly revolutionary new technology.
But we do not believe a handful of AI-related stocks like NVIDIA, Microsoft, Alphabet (Google) and Meta (Facebook) can prevent a major bear market from occurring — particularly after the Fed has raised rates at the most aggressive pace in history, caused money supply to decline and created the deepest yield curve inversion in 40 years.
We don’t even believe the Fed can prevent a bear market once the recession we expect takes hold and drives up unemployment, which we believe is likely in the coming months. The Fed certainly hasn’t been able to prevent bear markets in the past, despite slashing interest rates during previous bear markets, including the early 2000s and 2008-2009 bear markets.
NVIDIA Earnings Guidance Shocked Investors
NVIDIA skyrocketed 24% yesterday after they beat first-quarter estimates (although revenues fell 17%, with Gaming revenues down 38%, and EPS fell 20%) and guided their second quarter well above consensus estimates due to surprisingly strong demand for their AI chips after the release of AI chatbot ChatGPT. As a result, EPS estimates for this year increased by a whopping 71%, from $4.53 to $7.76.
NVIDIA is now trading at 49x forward earnings. While that is less than the 67x it traded at before they reported, it is still a very high valuation. Apparently even NVIDIA management thought the stock was too expensive to buy in the first quarter, since they did not execute any of their $4 billion stock buyback program then.
Why Stocks Fall During Recessions
Stocks typically fall significantly during recessions for two reasons:
- falling earnings
- lower valuation multiples on those earnings due to investor risk aversion
In a recession caused by higher interest rates and slower money supply growth, businesses lay off workers and consumers cut back on spending, particularly on big ticket discretionary items like computers. We’re already seeing that this year, with PC shipments down 30% in the first quarter. This causes company revenues and earnings to fall.
In addition, risk-averse investors sell stocks to raise cash during a recession, which drives down valuations and stock prices significantly.
Bear Markets Can Be Brutal
Remember that NVIDIA fell 69% from November 2021 to October 2022 with no recession. NVIDIA has a beta of 2.02, which means it typically moves up and down with the S&P 500, but at twice the pace.
Despite their incredible innovation over the years, NVDA fell 43% during the covid panic of 2020, 85% during the 2008-2009 bear market and 90% during the early 2000s bear market.
That is worse than the Philadelphia Semiconductor Index (“SOX”), which fell 38% during the covid panic of 2020, 69% during the 2008-2009 bear market and 85% during the early 2000s bear market. It is also worse than the NASDAQ 100, which fell 30% during the covid panic of 2020, 54% during the 2008-2009 bear market and 83% during the early 2000s bear market.
Even a highly profitable and stable Tech company like Microsoft, which has a much lower beta at only 1.18, fell 30% during the covid panic of 2020, 59% during the 2008-2009 bear market and 66% during the early 2000s bear market.
NVIDIA is currently overbought on a daily, weekly and monthly basis based on the RSI indicator. As the weekly chart with the weekly RSI (bottom clip) below shows, NVIDIA has been this overbought many times over the past 20 years (red vertical lines). That did not a deter a very strong bull run from 2016 to 2018 (green arrow). But the other six times, it led to significant declines, particularly during the 2008-2009 bear market, after the Fed raised rates, slowed money supply growth and inverted the yield curve.
Unfortunatley when it comes to stocks, monetary policy always overwhelms technological innovation.
For details on investing in individual stocks, please see our free education course entitled ETF & Stock Basics. |
What does the latest retail sales report tell us about the economy?
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Why is money supply growth important and what is it telling us now?
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Who will likely suffer most from the current banking crisis?
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What is the likely success of BRICS countries to replace the dollar and what are the implications for the US?
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Since balance sheets are healthier than before the Great Recession, won’t this recession be mild?
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Will the banking crisis cause the Fed to “pivot” and cut interest rates?
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What do you make of Fed Chair Powell’s recent comments?
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What are the implications of the recent stock market selloff?
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What are the economic and investment implications of the latest inflation data?
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Do you expect a global recession, as well as a US recession?
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Is this stock market rally the beginning of a new bull market?
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How are investment opportunities different between bull and bear markets?
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What are the implications of the December employment report?
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What do you think of the market’s reaction to Powell’s recent comments?
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Are there any signs a US recession has ALREADY started?
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What is the best indicator for anticipating and trading bear market rallies?
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When do you expect the Fed to “pivot” and cut interest rates?
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Vanguard will only allow me to profit from bear markets by trading options. Suggestions? Can you manage my money?
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Is it a good time to invest in real estate if higher inflation and interest rates cause a higher demand for renting?
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Given OPEC’s recent oil production cut, do you still believe oil markets have more bear market downside to come?
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What do you think about buying Palantir Technologies (PLTR) stock right now?
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What do ETF investors need to know about K-1 tax forms?
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What caused the current high inflation and what did the Fed do wrong?
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What does the European energy crisis mean for investors?
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What do you think about investing in Gold Mining stocks now?
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Do you think Bitcoin is likely to fall to new lows?
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What is Quantitative Tightening and how will it impact financial markets?
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What are the best and worst stock sectors in a bear market?
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How have your forecasts worked out over the past year? (Part 2)
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How have your forecasts worked out over the past year? (Part 1)
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How can you use volume as a technical indicator for investing?
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What problems are caused when banks create money out of thin air?
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Are dividend growth funds a good long-term investment at the moment?
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What do you think of Yellen’s comments that we will not have a recession?
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Do stocks always outperform T-bills and inflation in the long run?
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Are inverse ETFs worth considering as investment vehicles?
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Any thoughts on Bernanke’s recent inflation and recession comments?
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Is Bitcoin or gold a better inflation hedge now?
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Does the negative GDP report mean we’re already in a recession?
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Will the next bear market be one big disaster or a series of crises? And what will the Fed do about it?
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Is the Fed really trying to crash the housing, bond and stock markets?
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Given inflation and bear market risks and opportunities, how can those of us with 401k retirement accounts invest, given our limited alternatives?
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What is different between now and the 2020 stock market crash?
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In your “Stocks & Commodities” article, there were 4 times since 2009 that met your “sell short” criteria but were not major bear markets. Thoughts?
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Inverse ETFs providers say the holding period should be no longer than a single day. How long do you hold these?
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What are credit markets telling us now about stocks and ETFs?
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What impact will the Russia/Ukraine war have and is the stock market correction over?
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How are major ETF asset classes looking on your Trend and Trade analysis?
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What does the latest inflation report mean for interest rates and the economy?
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Is the stock market rally over?
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What do your measures of stock market sentiment and internals tell us about the outlook for stocks and ETFs?
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What are technical trend lines telling us now about stocks and ETFs?
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Is it better to invest in Growth or Value stocks now?
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What is the best indicator to determine if a stock or ETF is “overbought” or “oversold”?
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What can the “Santa Claus rally” and “January Barometer” tell us about the outlook for the stock market in 2022?
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How will the latest Fed announcement to fight inflation impact stocks and ETFs?
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What is the VIX, why is it important and what is it telling us now?
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How will new Covid variants impact the economy and stock market?
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What do you think about investing in TIPS versus traditional Treasury bond ETFs given high inflation?
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What are the implications of high inflation for stocks, ETFs and the economy?
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Are we in another housing bubble?
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Why is EPS growth so important in stock investing?
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What can stock and ETF investors learn from the fact that Japan’s stock market is still well below its highs of 30+ years ago?
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Do you think the economy is heading towards “stagflation”?
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Your MarketWatch.com interview seemed very bearish. Are there any stocks or ETFs you recommend buying right now?
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Shouldn’t stock and ETF investors focus on current money supply growth, since it drives the economy and stock market?
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Why shouldn't investors just follow the simple Wall Street rule of “don’t fight the Fed”?
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How can you make money — instead of lose money — in a major bear market with ETFs?
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How important is stock market seasonality for stock and ETF investors, particularly in September and October?
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How concerned should stock and ETF investors be about margin debt levels?
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Are US Treasury Bond ETFs safe long-term investments?
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What are the key characteristics of winning stocks?
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What are the best and worst trending stock sector ETFs right now?
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What is the likelihood the next bear market and recession will be even worse than the Great Recession of 2008-2009?
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What impact will the US government’s stimulus package have on the economy and stocks?
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I've never invested before in my life. How do I start?
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How do you place a GTC and T-Stop order?
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What is wrong with a “buy and hold” or “asset allocation” investment strategy?
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Why is it so important to keep investment costs low on stocks and ETFs and how can that be done?
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What is the best way to invest to retire early?
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What are the best ways for investors to profit from stock bear markets, such as the 2008-2009 Global Financial Crisis?
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What are the historical long-term returns of stocks, bonds, bills, REITs, housing, gold, commodities and inflation?
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How can technical analysis be helpful to profit from bull and bear markets in stocks and ETFs?
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What is the primary cause of bull and bear markets in stocks and ETFs?
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How do you use economic indicators to determine the outlook for the economy, stocks and ETFs?
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How can you estimate the long-term returns of stocks, bonds, REITs and other financial assets?
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