Editor’s Note: Confidence is a funny thing. You can have a lot of it when everything is going your way but lose it quickly when things beyond your control begin to go against you.

That may explain why consumer confidence is falling off a cliff. A few days ago, The Conference Board reported that its Consumer Confidence Index fell to its lowest level in more than four years last month.

Even worse, survey respondents are feeling more pessimistic about the future than they have in twelve years. That survey’s sponsor suggests, “worries about the economy and labor market have started to spread into consumers’ assessments of their personal situations.”

The good news is that consumer confidence is not a reliable predictor of stock market performance. It bottomed out in 2009, just before stocks took off, and again five years ago, also shortly before a major stock market rally. Let’s hope that happens again this time!

Fed Watching

A year ago, I discussed a remarkable run up the charts by homebuilder Toll Brothers (NYSE: TOL) that propelled its share price 86 percent higher in just five months (“Toll Brothers Rings the Bell”). During that span, TOL rose from below $70 to above $120.

That rise occurred shortly after the Fed stopped raising interest rates, and was presumed by Wall Street to be on the cusp of lowering rates as inflation fell. And since lower interest rates make home mortgages more affordable, the housing market should boom.

That expectation proved true, sort of. In September 2024, the Fed did cut its policy cut by 50 basis points. Over the next three months it reduced it by another 75 basis points to bring the range down to 4.25 – 4.50 percent.

It has stayed there ever since, as the annual growth rate for inflation leveled off around 3 percent while the jobs market strengthened. There’s no need to artificially reduce interest rates while consumers are gainfully employed and spending money at a healthy clip.

Trade War Woes

That is why I felt TOL had become overvalued. When Wall Street is expecting nothing but good news after a stock has nearly doubled in share price, it doesn’t take much bad news to send it sprawling.

I said then, “Just as Wall Street tends to overreact to bad news, it can also get carried away with unbridled optimism.” I also noted, “now that everyone else is buying in, I think it may be time to bail out. Sooner or later, some reversion to the mean will be in order.”

That happened eight months later, after TOL peaked around $165. That was a few weeks after the general election in November, when optimism for the economy was running high on Wall Street.

But now that the Trump administration appears committed to carrying out its threat to engage in trade wars with all our major trading partners, Wall Street isn’t sure what to expect from the economy this year.

A few weeks ago, TOL traded below $103 for the first time since February 2024. That puts it back to where it was one month before I wrote the article referenced above, wiping out all that gain.

Fire Up the Bandwagon

The meteoric rise and fall of Toll Brothers raises a tantalizing trade prospect. If Wall Street views homebuilders as “the canaries in the coal mine” of our economy, then TOL may be poised to shoot up the charts again once the Trump administration is finished with its trade war strategy.

If so, then the huge profit my readers made a year ago could happen again. Especially if the inflation numbers start coming down so that the Fed can cut rates more aggressively than it is currently projecting for this year.

When that happens, homebuilders should start feeling more confident and homebuyers should be filling out more mortgage applications. That may be all Wall Street needs to see to get back on the Toll Brothers bandwagon that they abandoned four months ago.