Halftime for the markets

0:08Rob Armstrong: Okay, who else needs a holiday? 2026 is 50 % loaded. We're halfway there and we're very much living on a prayer. Markets have been on a kind of wild and honestly kind of stupid ride. Threats of war, actual war, rotations and brotations, and a big jump in fun-sized stocks. Worse, the Americans are getting into football and starting to talk about the offside rule. This feels like the bit in Jurassic Park where the velociraptors learn how to open doors. Today on the show, what does it all mean? Does it mean anything? What are we doing with our lives talking about markets? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

0:57Rob Armstrong: I'm Katie Martin, a markets columnist at the FT in a slightly cooler and football-mad London. Joining me down the line from his bunker in Long Island, hopefully without the technical issues he had earlier this week, is soccer cat Rob Armstrong. Rob.

1:13Katie Martin: I was going to say congratulations to the Britain soccer cats, which I think is what your team is called. Katie, I should mention that we are near our day of national independence, the 4th of July. And what we do to celebrate independence in this country is we mow lawns. And so you may hear out here on Long Island, the sound of a lawnmower in the background, because there is always a lawnmower going.

1:44Rob Armstrong: Is this also the holiday where you all like throw fireworks at each other?

1:51Katie Martin: this is the one sounds fun see I used to have a pinky finger day I think is what it's called

1:58Rob Armstrong: yeah so look some years you feel like you have a sort of spell in markets and you kind of know what to call it or you know what the big theme is and I don't know like I really feel like so far in 2026 we've just been trying to nail jelly to a wall like it's just like what what is even the big theme what is going on yeah like am i alone in feeling like just sort of spun around

2:23Katie Martin: no you are not and as we have mentioned but perhaps not paid enough attention to on the show before i think the biggest narrative of this year might be this year to date might be the fact that in the last month the master narrative of the last five years has kind of broken down and that master narrative is watch the Magnificent Seven go up, right? And that, you know, the Magnificent Seven could do no wrong. It led the market up. When it stumbled, everything went down. And you might have told the story, it's AI, it's the Magnificent Seven, everything is great until June started. And then it's like everything falls out of bed.

3:06Katie Martin: And you're like, where are we? Right?

3:08Rob Armstrong: So we've talked about the Magnificent Seven, but let's just kind of rewind for people who've missed this whole thing. There's like a clutch of seven massive stocks in the States, most of them very tech-flavored. We always forget at least one, but we're talking Apple, Alphabet. Amazon. Microsoft. Meta. Amazon, Meta.

3:27Katie Martin: The one we'd all like to forget is Tesla, which is kind of like in a family of seven, it's like the embarrassing brother who went to prison and nobody wants to talk about it.

3:37Rob Armstrong: We don't talk about him. The black sheep of the family.

3:41Katie Martin: When I think about it, I like to swap out Tesla and swap in Broadcom. But officially, Tesla's in there.

3:48Rob Armstrong: But so the point is, this is what I was talking about right at the top. This is one of the big rotations. So if you look at one of the big sort of U.S. stocks indices, it looks a bit like a plateau, but it's still broadly going up. But beneath the surface, you've kind of got this kind of wrenching noise because the leadership has completely switched. because those Magnificent Seven stocks have become, like the Mag Seven has become the Lag Seven. And in fact, we pointed this out in the newsletter today, the Magnificent Seven group of stocks has underperformed UK government bonds so far this year, which is not something.

4:24Katie Martin: Which is very sad. That's a sad story. That's like a seven-word tragedy right there you just composed.

4:32Rob Armstrong: Yeah, like a tragedy in three words, worse than guilt. There you are. But that's like, so you've got that kind of tectonic shift beneath the surface of US stock markets, which therefore is a global stock markets because they're just so much bigger than the rest of us. But it's everywhere, right? So at the start of this year, it feels like a million years ago now. But remember, like gold and silver went absolutely parabolic. Bananas. For like, just completely bananas. And then they just kind of went, like all the air came out of those things and they've come straight back down. Okay, gold is still trading at about$4 ,000 an ounce, but still, this is not the sort of crazy rally that we had in January.

5:16Rob Armstrong: And then similar but different, you had that massive move in the oil price that happened when the bombs started falling on Iran. That sort of went up to the best part of$120 a barrel. And then, again, huge sucking noise. We're right back down to$70 a barrel. So there's lots of, I don't know, there just seem to be like themes that don't stick and narratives that don't stick and a lot of turmoil beneath the surface that's really not reflected in the broader market.

5:46Katie Martin: This brings up the topic of small cap stocks, which I'm always enthusiastic about. And I'm always waiting for the great small cap resurgence. And this year we've had it. The S &P 600, which is my preferred index of small cap stocks, is beating its big brother, the S &P 500. And, you know, it's like Christmas is finally here for small caps fans.

6:11Rob Armstrong: I don't know what to make of it. So the Russell 2000, that's like, you know, we're going to call them fun-sized. They're pretty sizable companies. Yeah, some of them. They were British companies. They'd be a really massive company.

6:23Katie Martin: But, you know, there's$10 billion companies in there for sure, you know, and more.

6:28Rob Armstrong: And they're up, God, if memory serves, I think we're talking about 20 % this year, whereas the S &P 500, which is the Mac Daddies, are up more like 7, 8. Yes.

6:37Katie Martin: And I did something this morning that I've never done before, which was break down small cap performance by sector. Every sector, and I use the S &P 600 because there's like in the Russell 2000, there's a lot of junky, unprofitable stocks. The S &P 600 uses a profits filter, so you know you have all real money-making companies or whatever. But basically, every sector of the S &P 600 is up this year. Worst performer is utilities, and that's up 8%, the small utilities. The winner, and most of them are in the kind of teens range, except for one which is information technology, small cap information technology is up 60 % almost this year.

7:26Katie Martin: And just to close that loop, the five best performing stocks in the S &P 600, none of which I had heard of before I checked, Max Linear, Ickor, Ickor, Ultra Clean, Vichay, and these are the - I didn't know better.

7:46Rob Armstrong: I would say you are definitely making these names up. Yeah.

7:50Katie Martin: Okay. In these five made up names, their industries are semiconductors, semiconductors, semiconductors, semiconductors, and data center installations. So like the same thing we see in the wider market. Now, none of those are a huge, it's not like the small cap index is dominated by semi names, but like that, that semiconductor theme we've seen in the big cap market does exist in the small cap market.

8:13Rob Armstrong: Well, let's say a little bit more about this whole semis thing, like chips mania in markets, right? So we've spoken about this before. The Philadelphia Semiconductor Index, the Philly Index, has doubled in the first half of this year. The Korean stock market is up 90, 90 % so far this year. Now, some of the steam has come out of these things in June, but whatever, as a first half performance, this is like incredible stuff. And it's almost like, you know it doesn't matter who wins the war you know bet on whoever is making the bullets

8:50Katie Martin: one commenter on the newsletter this morning said waking up every morning and seeing what the cosby did the night before is like playing russian roulette every morning you know

9:01Rob Armstrong: so the cosby is the korean stock market some mornings it's up 15 some mornings it's down 15

9:07Katie Martin: it's like this fun little bit of drama when you roll out of bed in the morning what happened in Korea the night before. Yeah, it's incredible. But, you know, the natural worry about this situation with chips is we know there's a massive shortage like Micron, which makes memory chips, which you need a lot of for AI data centers. They can't make them memory chips fast enough. You know, this is toilet paper during COVID, right? Like, where is it? How can we get it? Whatever price is offered for it, we will pay. But, you know, those situations end. And so there is a guessing game feeling to this, Katie, where it's like, well, at some point you go in cycles like this in cyclical industries, you go from shortage to glut.

9:51Katie Martin: And is that like in six months? Is it in five years? We don't know because we don't know how long the AI data center boom will last. Right. So there is.

10:01Rob Armstrong: The problem with this is like, so I don't know, you're probably familiar, Rob, you know, like FT Alphaville, like the kind of market-see blog and the FT listeners, if you don't read it already, then do. It's free. But they've been running this thing called This is Nuts, Where's the Crash? Where they point at stupid pockets of excess and massive jumps in price that are scattered around markets and say, look, this is clearly a sign of madness. When's the crash? They have been running this tagline for the past 20 years.

10:35Rob Armstrong: so i'm inclined to feel the same way about this now so you look at this madness in chip stocks and you think this is nuts when's the crash probably never yeah so i mean there's a deep

10:46Katie Martin: lesson here katie which is that there's always at least one insane thing happening in risk markets that makes you think our species has completely lost the thread and there is no hope for us right and some there's some corner doing that at any given time and you can't you can't let that panic you too much because it's just a continuous feature of you know human psychology as displayed

11:11Rob Armstrong: in the stock market so we we've spoken about this before and um we spoke about it with rasheer in new york just the other week around this idea of you know if you look at all this nuttiness and you think i just don't want to get involved in this i want to buy nice boring stocks rob you've been a big advocate for boring stocks over the past few months you love a bit of boring and it's this idea that you buy you know good quality stocks in good quality companies that appear to be underpriced for no good reason now i was just reading some stuff from an outfit called trivariate research before i came up here they said that if you had um over the last quarter run uh run a strategy that was long value and short growth, so you were buying boring stocks and you were avoiding or maybe even shorting, you know, whiz bang tech stocks, you will have lost 16 % in the second quarter.

12:05Katie Martin: I would just like to note for the record that quality and value are two different kinds of stock. But your point is well taken. Fine. But I'm just saying overlapping, but they often overlap. That is true.

12:16Rob Armstrong: Yeah.

12:16Katie Martin: Yeah. Yeah.

12:17Rob Armstrong: But yeah, this, you know, if you want to kind of be clever, clever and say, well, this is silly. I'm going to avoid all this tech mania. You're getting carted out by this really forceful rise in fizzy stocks. There's just no way to avoid it and hold on to your job.

12:33Katie Martin: So I will say, Katie, that in recent weeks and months, there has been signs of these kind of quality or value things doing a little better or defensive stocks doing a little better. So we've seen a good run by health care. You know, staples have done OK for a change. So there is a sense that perhaps people who run discretionary portfolios are saying, we've all been massively overweight US big cap tech forever. We've made a load of money. Maybe it's time to try something else, which might help to explain the good performance of small caps this year.

13:09Rob Armstrong: Now, one thing that is really bad news for small caps is big rises in interest rates because small caps tend to have more pressing needs to borrow. They're more sensitive to borrowing costs. They have much more borrowing on their books as a proportion of the overall business.

13:27Katie Martin: And they're just linked very tightly to the U.S. domestic economy, period.

13:31Rob Armstrong: Yeah, all of that stuff. So they generally don't like big rises in interest rates. And again, we've spoken about this before, but that is like a big rise in interest rates would be very much the thing that could pop this this whole bubble that we're seeing here so just before we recorded we'll started recording we had jobs numbers out of the states now normally everything is wrong with jobs numbers in the states coming out on a thursday everyone knows they come out on a friday but you guys have got a holiday on friday so the numbers came out on on thursday and sad trombone noise they were not how do you spell that katie how do you how do you spell

14:11Katie Martin: Wah, wah. If we ever want to use that in a title, listeners, write in with the spelling of sad trombone noise.

14:18Rob Armstrong: Yeah. Unhedged at ft.com. Let us know. But yes, sad trombone. So previous month, very, very good numbers. This month, what was it? 58 ,000 jobs added, which was a lot fewer than people have been expecting. It's not disastrous. And the unemployment rate was like, you know, pretty standard. So it's not like there's a jobs crisis in the States or anything, but it looks like that trajectory of ever higher, you know, jobs added numbers every month. That is stumbling a little bit.

14:49Katie Martin: Yes, I haven't had time to really comb through these numbers this morning, but the like slightly longer narrative is we had this period of some months over, you know, starting last year where there was like no jobs added whatsoever. And there was total stagnation in the U.S. job market. And the talk was like, the population's not growing. You know, there's less immigrants, you know, so there's less job creation, et cetera, et cetera. And we're just at like zero is the new normal. And then in the last three months before this month, the three months ending in May, we got these quite solid, unexpectedly solid job numbers.

15:31Katie Martin: And it's like, is the U.S. economy reaccelerating? Is the zero is the new normal story now false? We're all thinking about this. So high hopes that we'd get 100 ,000 jobs or 100 ,000 plus jobs for June. And we got 50 odd thousand. Right.

15:47Rob Armstrong: Yeah. And all things equal, that means that this is actually a bit of a lifeline to our friend Kevin Walsh, who now runs the Federal Reserve. And it means that maybe he doesn't need to raise rates after all. Like he wants to cut interest rates. That's very much the narrative that he fed to Donald Trump while he was kind of auditioning for the job. This might enable him to do that or at least not to kind of raise rates aggressively, which earlier this year was looking like you might have to do when you had jobs that were going great and inflation that was picking up pretty handily. Maybe that need is waning a bit.

16:31Katie Martin: Yeah, I think that's true. And, you know, we never we want more job creation. We want more people employed. We want them earning more money. This is all stuff that we want. But for this one very niche issue of what monetary policy is going to be, a softish jobs number does help the Fed not have to tighten monetary conditions and slow the economy that way. And it's worth noting about this jobs report that a lot of the job creation, and this is always something you worry about in terms of the strength of the economy, came from non-cyclical sectors. So education, health care added 70 ,000 jobs this quarter.

17:11Katie Martin: And those are not sectors that grow because the economy is booming. They grow because you're like, your society is old and people are going back to school or whatever. so um so that i mean it was not working at the world cup like is there not like a surge in jobs for people working no the hospitality numbers were down a lot this month which was totally unexpected i my guess is that that is why economists were surprised is they expected kind of hotel and restaurant jobs to go bananas and they did not and that could be a quirk you know any given month you can have a weird reading it's very hard as it turns out to take you know 200 plus million employed people and guess how many of them are employed at a single point in time is quite hard.

17:59Yes.

18:00Katie Martin: But I just want to, I want to squeeze in one more point, which that also helps Warsh, which is that the wage picture continues the rate of wage growth in both nominal and real. That means dollar and inflation adjusted terms. Wage growth continues to cool and real wage growth is like zero-ish. And so however money jobs you're creating, you don't worry as much about inflation when wages aren't growing. And that is important if Kevin Warsh wants to keep rates where they are or even cut them.

18:33Rob Armstrong: So, you know, we're halfway there. We're halfway through the year. With that whole picture in play, with this whole situation where maybe interest rates don't need to rise quickly, what do you think that says about what the second half of the year has in store? Because I sort of feel like if, you know, threatening to invade Greenland and dropping bombs on Iran and all of that can't, you know, meaningfully knock markets off direction, you know, can't even really disturb their direction for very long. I'm struggling to see anything other than the path being higher in the price of risky assets.

19:14Katie Martin: Well, as we said in the newsletter today, Katie, there is an extremely uncomfortable bit of role reversal going on here because you are the House pessimist and I am the House optimist and you feel a bit optimistic about the second half of the year. I wouldn't say I'm pessimistic, but I'm not seeing the party starting up again necessarily. I would say, pensive is the word I would use for the following reason. I don't like markets that don't have a strong trend. I reread recently for another thing I was working on this great book from a long time ago called Reminiscences of a Stock Market Operator, which is this Romanoclef book about a famous trader from the early part of the century.

20:02Katie Martin: And he discusses how he makes money during stocks. And he says, no matter what else is going on, I have to buy a market that's going up. I like momentum. I'm not trying to get bargains and buy up when the market is falling. I buy into a rising market. And I really think that's true. And I don't like the fact that, as you described very well earlier in the show, everything is kind of wishy-washy and unsure and swapping around or whatever. I like it when markets have momentum and I'm just not seeing any of it out there.

20:34Rob Armstrong: Well, momentum is absolutely what we need. So let's just roll straight into a quick break and then come back in a minute for Long Short.

20:51Rob Armstrong: Alrighty, it is time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Rob, what are you saying?

20:59Katie Martin: I am tragically short the anchovy. I'm an anchovy junkie. And our former colleague, Javier Blasso at Bloomberg, wrote a terrifying article about a collapse in the global anchovy supply. And this is bad for fish farming, apparently, but for me, it's bad for pizza. So I'm worried about the anchovy and I'm short and it's all terrible.

21:23Rob Armstrong: That is terrible. I think you know what I'm going to say. I'm going to have to be long dogs. Oh. We, very sad times in the Martin household. We had to say goodbye to our beloved dog this week. It was awful. This is why I was not around on Tuesday. Anyone who has dogs knows it is just the worst thing. It's so bad. So.

21:44Katie Martin: The worst. We don't deserve dogs. They are better than us.

21:48Rob Armstrong: Much purer souls than we are. So very sad times, but I'm still long dogs. Listeners, we are going to be back in your ears on Tuesday, assuming Rob hasn't blown himself up with fireworks. 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 Foreheads. Special thanks to Laura Clark, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free and 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.