Boring but sexy (stocks)

0:05Pushkin. I sense a disturbance in the force. It's hard to know when you're in the middle of markets shifting from one mode to the next, but it really feels like that might be happening now. The reason, of course, is NVIDIA. The chipmaker put out some decent results last week. In fact, to be honest, it put out some pretty extraordinary results last week, but investors are just not lapping it up like they used to. The stock is already up by 11 bazillion percent this year, and it's kind of stalled. So today on the show, we're asking, are boring stocks sexy now? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

0:50I'm Katie Martin, a markets columnist here at FT Towers in London. And I'm joined by that guy in New York who writes about men's fashion in the FT sometimes, Rob Armstrong, who is also head honcho of the Unhedged newsletter. Rob, how do you feel about boring? Is boring good? I am the living embodiment of how sexy boring can be. The only reason I was able to get married at all. Yeah. I really think you put your finger on it. The problem. Should we just wrap it up now? Yeah. Yeah. You nailed it in the intro. Let's quit now. So let's just very quickly talk about how good the news was from NVIDIA.

1:27NVIDIA, for anyone who is lucky enough not to have paid attention to this, is this like This incredible success story of a chip maker that's become like this gigantic company, not exactly overnight. Biggest company there ever was in dollar terms. It's just extraordinary. And so last week it put out some earnings numbers and is very much riding the artificial intelligence wave. And it said that its revenues have more than doubled to$30 billion. That is a chunk of change. And it says in the next quarter, we're going to make$32.5 billion. And the market's like, well, it could have been more, couldn't it?

2:09Yeah. We were hoping for better from you. We were. Looking for improvement. We're a little disappointed. I mean, what do they want, blood? This is ridiculous. Must apply self, says the report card. Must try harder. Good news is not good enough, Katie. Yeah. We need unbelievably good news. not just for NVIDIA, but for stocks like Microsoft as well. Yeah. You know, other AI names, Google maybe too. Yeah. There's been so much good news. That's been priced into the stocks. And now we need unbelievable news to make these stocks move, which raises a tricky question, which is what makes the market go up?

2:50Yeah. If not these guys. Let us think back to miserable March of 2020. Oh, we have to. It was so bad. COVID was going to end the world. Since then, the market has doubled. Yeah. And about half of the gains in the market in terms of value, in terms of dollars, have come from the magnificent seven stocks, the big tech stocks. 13 % of the games came from NVIDIA alone. Craziness. NVIDIA has added$3 trillion in value over that period. So who's next is the question. Next person up, who is that next person? And it's a tough question because we're so used to this tech theme, this AI theme. Where are we going next?

3:30So this feels a little bit to me like the law of large numbers, right? It can't just keep doubling, tripling forever at some point, unless this is going to become like a$10 trillion company by the end of the year, then something has to give, right? But are you convinced that this is kind of it for the tech leadership in markets? Or do you think this is just a bit of a sort of summary head fake? These stocks were actually on standard metrics of valuation. These stocks a year or two ago weren't terribly expensive because their earnings were so strong and their earnings were growing so quickly that the valuations looked like kind of like normal stocks.

4:12That is not true anymore. Yeah. Now they're just plain expensive stocks. NVIDIA is trading at over 30 times earnings. And it's like, yeah, we need, you know, they have priced in a very, very big future. So it's important to emphasize we're not talking about AI coming to an end or tech becoming less important or whatever. We're talking about what's in the price. And the answer right now is a lot. A lot is in the price. A lot is in the price. So something else, you know, if the index as a whole, whether it be the S &P 500 or the entire market is going to continue to mark up gains, Maybe we shouldn't look to these names to be the ones that drive it.

4:49But I should say that it's not true that the Magnificent Seven as a group have all sort of peaked. So NVIDIA peaked back in June and has been kind of sideways to slightly down since then. The big tech stock that has done quite well since June is Apple. And my pet theory about Apple is that it is now a defensive stock. It's like the equivalent of a consumer staple stock in investors' eyes. So if you're like a little worried about how the world is shaping up and you don't know how the rate cuts are going to go and maybe the economy confused you a little bit, Apple is a logical stock to buy. Because a lot of people have Apple phones.

5:36No one will ever stop using Apple phones. because it's such a hassle to switch. I'm an Android girl, I've got to say. Yeah, you somehow don't have the infection, but everybody else has the Apple fever and there is no cure. So they figure the service revenue keeps coming in forever. And it doesn't matter if nobody else ever buys an Apple phone. It's just an annuity that will run forever now. So that stock has actually done quite well. Other stocks that have done quite well. Let me just continue rhapsodizing on this theme. Other stocks that have done quite well since NVIDIA has stopped performing so brilliantly.

6:18Berkshire Hathaway. I mean, boring is sexy. I mean, who's sexier than Warren Buffett? The king of boring. United Healthcare, health insurance, ExxonMobil, Walmart, JP Morgan Chase. So these stocks, boring stocks have done us pretty well this summer, basically yeah yeah and you know so on the one hand you could look at this and say you know oh my goodness everything is terrible the ai stocks aren't doing the heavy lifting anymore this is all this is all awful but it doesn't strike me that that's the mood in markets at all actually what investors are saying is oh thank god finally we can stop relying on this tiny number of stocks to do all the hard work and the rest of the market all these other companies that going to be beneficiaries of AI because they're going to actually use it to enhance their productivity.

7:11Although every time I come into contact with AI, I think it's rubbish. I don't know if it's just me, but, you know. But it will not be rubbish soon. Soon it will not be rubbish. Less rubbish. So, you know, this is a very healthy development, right? Yeah, I think that's right. The concentration of the market before June was scaring everybody. Yeah. And one can only imagine the frustration of people who are paid to manage money. Yes. When there is literally one trade out there. Yeah. Like either you're overweight AI or you're about to get fired. Those were the options for money managers. And you can't overweight something that's already 26 % of the index unless you're insane.

7:55Yeah. Yeah. And now other stuff is working. The best performing sector in the S &P 500, Katie, since June, real estate. The reason that's done so well is pretty clear. People think rates are going to fall. Yeah. And when rates were high, everybody thought a lot of real estate companies were going to go out of business because they couldn't make their interest payments. And now they might get to live. So those stocks have really jumped on the possibility of life. But you know it's utilities it's financials it's health care and so if you know if you were positioned well in those spaces you've been performing well and remember the in it's not like the index is falling the index is no is near highs yeah yeah we're still sort of very close sort of tickling another all-time high right yeah cruising along um you know but i will say we have had so many exceptional years in a row.

8:54So as you know, Katie, the very long-term average real return for the stock market is like six and three quarters of percent. And stock markets regress to that mean with surprising regularity. And we've like had all these years that are like, you know nominal returns of 15 percent 20 percent 25 percent 12 percent you get really accustomed to things really quickly and you're like okay so this is normal now so i need my 15 otherwise i'm gonna have to yolo it all in crypto or something to satisfy satisfy that it exactly but of course just saying things have been very good for a long time is not a sufficient reason to think things will now be bad.

9:44That's not how it works. Just because you've flipped heads three times in a row doesn't mean flipping tails becomes more likely now. It's still a 50-50 coin you're flipping or whatever. But it is a bit spooky, no question. To me, the big challenge that we're facing here is that the good thing about AI stocks like going bananas and lifting up the entire market is that it was really good for journalists because we got to call it, you know, it's the Magnificent Seven. It's the AI trade. It was a really easy kind of package. You know, if you open a financial newspaper or if you listen to financial TV or even watch it, you know, that was very much the thing.

10:26It had a nice little catchphrase about it. How are we going to make boring stocks sound exciting? Here's a way to think about it. We haven't just seen big tech stocks do incredibly well in the last, I don't know, five years. It's been American stocks. It's been big stocks. And maybe now is the time, and this has played out a bit over the last three months, maybe now small stocks. We could have a small stock rally, which is kind of cool. We could have a value stock rally after growth stocks have been all the rage. So cheap stocks might be interesting again. Rob Armstrong, are you on the brink of recommending that people buy stocks from somewhere other than the US?

11:14This is new territory for you. I'm just saying regime change can be kind of interesting. And we've had this incredible run for large American growth stocks. And what about small, international, and value? And for listeners who don't know what a value stock is, it basically means a cheap one. A company that the price has not run up so much and that gives you good cash flow for your dollar. I'm just waving at you over here in British.

11:48Yeah, exactly. In other words, the entire country of the United Kingdom. It's like a value. It's a value country, really. I mean, yes, regrettably it is. But, you know, everyone has their time to shine and UK markets have actually been doing pretty well. So don't knock it. Be the UK's time. Yeah. So I think I think there is some appeal in this. We can get excited about a small capital rally, a value rally, international emerging market stocks, all this stuff. And of course, there's something of a fundamental backstory to all of this, which is that for a while, American interest rates were higher than the rest of the world.

12:28Capital was coming to the United States. Now we're in a rate cutting cycle. Maybe that interest rate backdrop kind of justifies a shift in regimes. Yeah. Yeah. It's a very contentious topic, but it's a possibility. Yeah. Yeah. I mean, you never know how much of a rate cutting cycle is already priced, but something has definitely shifted. It feels like a shift. And you never, as you alluded to at the beginning of the show, you never quite know while you're in it that you are living in a regime change. Yeah. It's one of these things. I know you're a big fan of Hegel. Yes. The owl of Minerva flies with the setting of the sun, as Hegel said.

13:09Rob, this is far too highbrow for a podcast like this. Why don't you tell us more about your friend the owl. The owl of Minerva is wisdom. The owl of Minerva is wisdom. And the setting of the sun is, you know, the end later. And so you only really know what's going on after it's already happened. This is not what this podcast is here for, man. Like, you know, we keep it real over on these shores. And on the theme of keeping it real, I still feel like I need in my life some sort of stupid catchphrase that we can use. Now that the Magnificent Seven trade is dead, we need a new catchphrase name, something to call the boring trade.

13:51So listeners, email us, robert.armstrong at ft.com, katie.martin at ft.com. Just give us a catchphrase that lazy journalists can use when we're writing about this whole thing, please. Thank you very much. It's the only kind of journalist there is, Katie. right there. On that note, we're going to be back in a second with Long Short.

14:22Alrighty, now it's time for Long Short, that part of the show where we go long, a thing we love, short, a thing we hate, except I want to do it differently. So in the allotted time that we have available, Rob Armstrong, wrong, i.e. about 90 seconds. Let's settle it once and for all. Has Jay Powell, chairman of the Federal Reserve, been lucky or good? He's raised rates up to the moon without tanking the economy. Did the guy just get lucky? Inflation's over. Just about. Inflation's over. The economy's not there. We're about a target. Yeah. So you've written about this in your newsletter today. So tell us, lucky or good?

15:02One thing that we're all pretty lucky at is that the pandemic ended eventually. Right? Yeah. So that really helped. So like the weird thing where we are all stuck in our house buying air fryers instead of going out to restaurants, that ended. And where we couldn't work our jobs for a while, that ended. All that turned out to have a very inflationary effect. And just that being over really helps inflation go down. And a reader under my column And I made a good point that like inflation went down in Japan and they didn't change rates at all through the whole thing. They're like this natural experiment.

15:39We all waste our time thinking about central banks. There's like how much ink have I personally spilled on Jay Powell's decisions? And maybe it all would have happened anyway. In the U.S., inflation went down in part because the labor market cooled, because a lot of immigrants showed up. My feeling is the chair of the Fed and the rest of us mostly just got really lucky. And that's why inflation came down. Productivity came up a little bit. And, you know, everything's kind of came together. Central bankers are not necessarily good at making things better, but they definitely can make things worse.

16:15So I'm going to say that there's like not no skill. You know, there is some skill involved. He avoided grotesque error. There's some skill involved in running the Fed. I'm saying props to Jay. I will admit that he had a bit of a kind of, you know, following wind of luck, but still. And I think you've enunciated a principle that kind of applies to life. Yeah. A lot of it is not making mistakes rather than actively doing things that are good. Yeah. Just like it's like a doctor, do no harm. Yeah. I think Powell has at the very least satisfied the Hippocratic Oath and done no harm to the patient. Yeah.

16:52I agree with you. For that, he is to be congratulated. But a lot of the patients returned to health was just circumstances and policy. You are just so here with the clever analogies this week. I know. I've really got it going. So listeners, please don't expect this highbrow tone to continue. Nonetheless, we will be back in your feed on Thursday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler.

17:32FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

17:59We'll be right back.