Learning to love the boom

0:05Pushkin. U.S. stocks are absolutely rollicking. And like any other point where stocks are doing well, it's going to invite some doubters, some bearers, some complainers. There's even been talk about U.S. stocks being in a bubble on the front page of the Wall Street Journal. Here on the Unhedged podcast, we're not quite in the bubble camp just yet. In fact, we think there are five reasons that U.S. stocks actually have a decent amount going for them. Today on the show, we discuss. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. And I'm reporter Ethan Wu here in the New York studio back from my week away from the show.

0:46Joined from London by markets columnist, Katie Martin. Katie, I appreciated you stepping in while I was gone, but I have to lodge a complaint. And actually, it's not my complaint. A listener filed a formal complaint about your shows, Katie. And this is from Antonio. It goes as follows. Since the podcast aired, two things happened. I started getting targeted adverts of vests slash gilets on my social media and the EBITDA cashmere vest you mentioned by Cavour is now sold out. How can I now pretend to be successful without my sample of the vest to parade in central London? Please advise, Katie. Well, first of all, I told Antonio, I actually saved him like a thousand pounds there for buying one of these vests slash gilets.

1:29And also it's Alphaville's fault. if in doubt, blame Alphaville. It was their idea to stop banging on about Gilets. Blaming Alphaville is definitely something we can both agree on. But something that people in the stock market cannot agree on is whether US stocks are in a bubble. The gains in US stocks this year have gotten so intense that you're now seeing on the front page of the Wall Street Journal, a bunch of articles about bubbles, bubbles, bubbles. We're in a bubble. And I think neither of us are in that camp, Katie, when we talk about it. There's some stuff that looks exuberant, but that bubble feels too far.

2:01And there are really legs to this bull market so far. And I think in particular, Katie, we want to talk about five things, sentiment, AI, interest rates, concentration, and the economy. Starting with sentiment, right? I think the general intuition people have is that you want to be greedy when others are fearful, fearful when others are greedy. So why is this a positive indicator, Katie? Your sentiment's really aggressive right now, really optimistic. Why shouldn't that make me bearish? Why should that make me boresh? Well, look, maybe it should make you bearish. As you say, people love to take the other side, you know, in the market's parlance of whatever the prevailing mood is.

2:35And so there is this idea that, you know, you buy when people are miserable and you sell when people are overly happy. But that is really not working out at the moment. You know, the kind of small band of remaining bears that are out there just keep on getting their arses handed to them and it's getting really quite uncomfortable for them. So I'm finding it difficult to pick out like bearish reports from the big investment banks or the big investment companies at the moment. So it just really feels like this positive sentiment is grounded in something real this time. It's not just kind of hope and optimism.

3:08There are like genuinely decent earnings and some spectacular earnings. And this is firing this whole thing along. Yeah. And I think it's that when sentiment gets really aggressive, you, the bear out there, don't really have a choice. You got to get on board or you're going to miss your benchmarks for the year, right? It's sort of the curse of everyone being benchmarked against the market is if you decide everyone's happy, so I'm going to sit out, your performance is going to look pretty bad that year. And so just to put some numbers to it, the common sentiment survey people look at is one from the American Association of Individual Investors.

3:44They put up this weekly data set on how investors are feeling about this market. Are they bearish on net or bullish on net. And that survey is now at the top decile of historical bullishness, which is not, you know, that's not as crazy as it's been, but that shows people are feeling pretty decent out there. There's a lot of anticipation of good news. This sentiment indicator has increased pretty sharply in the last couple of weeks. So I think that really kind of shows where the market's head is at. And to talk about sentiment, we got to move to the second reason, which is driving a lot of this, which is AI, Katie, AI.

4:17You're not even talking to Katie at the moment. You're talking to a robot, Katie. We've already automated one job away at the Unheaded Podcast. Yeah, no, I mean, especially since those NVIDIA results that Rob and I were talking about last week, you know, that absolutely just left the bears just stumped. It's kind of this mic drop moment for them. And, you know, one of the interesting things around this, and that actually relates back to the first point you raised about sentiment, is that if you think that the fact that we're at an all-time high on a nominal basis in U.S. stocks means that you should not put money into work in U.S.

4:56stocks, then history and maths are not with you. All the data shows that when markets hit an all-time high, they just keep on motoring higher, generally speaking. And there's no real way to pick out a moment that says just because you're at the top means that markets are going to pull back. It doesn't work like that. Markets continue to perform perfectly well in the 12 months after you hit an all-time high, according to all the kind of historical data. So the trend is your friend. And I think on AI in particular, right, the event that's been keeping markets running along has been NVIDIA earnings.

5:27And I think why that matters is it puts some kind of fundamentals to the AI story. And there's a lot of stories that capture markets imagination without really being tied to anything. See crypto, see other various bubbles past. But I think people look at NVIDIA and say, this is real private capital being put to work in the AI space. Other enterprises deciding in a decentralized way that no AI is actually a serious deal. We need to be stocking up on Nvidia chips. That's showing up in what Nvidia can charge for those chips. We'll see how that story actually turns out. But there's something real there.

6:02And I think when there's something real, it just makes the bullishness that much easier to stomach. And we've gotten, Katie, a recent stress test of the AI story, which has to do with our third bullet point here, which is rates. There's been a shift in rates expectations. And I think it's kind of surprised us, hasn't it? Yeah, it certainly surprised me. So, you know, one of the big kind of expectations running into this year, and it already feels silly looking back on it, is that we were going to get six rate cuts from the Federal Reserve in 2024. Without a recession, by the way, which also quite weird.

6:38But yeah, these expectations have been absolutely stripped right back. So the market has gone from saying, yeah, we think we're going to get six rate cuts to maybe we're going to get four, possibly even three. And the stock market, which is supposedly, you know, really closely linked to the bond market, which in turn is closely linked to the interest rate outlook. Stocks have gone, whatever. We don't care about rates anymore. We're not scared of higher interest rates anymore. This is a massive shift in the mood. So that's telling you something about how resilient this is for my money. Yeah. And I think of it very much as kind of a stress test, right?

7:15You could make the argument that the bullishness we're seeing in stocks is just downwind of the really ridiculous, aggressive rate expectations that are put in the futures market and into the bond market. And the second that those go away and start to reckon with the reality of what the Fed will actually do this year, you're going to see stocks sell off because it just cannot last. And that has proven wrong. Stocks have powered on, like you said, Katie, just as expectations have been revised on interest rates. I think there's a live debate about how many cuts we're getting this year. The consensus still seems to be three.

7:47You know how people out there saying zero or one. It's an interesting conversation, but in some ways it's not as important for stocks because they've shown so much resilience to the shift in expectations. So I was talking to a bond fund manager the other day and saying, look, why doesn't anyone care about your market anymore? Why? You know, we've got higher yields. We've got higher for longer. Why isn't the equity market selling off? And he said it never made sense for that to be the rationale in the first place. The reason why we have higher for longer is because we have a resilient economy. So to go from higher for longer to stocks must mechanically fall is in a lot of ways a really flawed way of looking at things.

8:23And so far, that's being borne out. Yeah, I think that's right. Well, Akita, let me throw our fourth point at you, which is about stock market concentration. And I think you could think of this as a knock against US stocks, right? What about the MAG7? What about how concentrated the stock market gains are with NVIDIA, Microsoft, Google at all. I mean, shouldn't that weigh against this rally? What about that? Maybe. Yes. You know, something goes wrong with NVIDIA and something goes wrong with global stocks. That's just a fact at this point, given how massive NVIDIA is. But it's funny, actually, sometimes I do like little sort of seminars for students and things like that because they ask me nicely.

9:00And one of the things they very often ask me is, where can I get stuff that I can read about markets that's free. And one place you can get stuff to read about markets that's free is the long-term investment yearbook product that UBS put out just last week. It studies basically every asset class on the planet going back to 1900. But like, you know, if you look at the levels of concentration you've got in US stock markets at the moment, yeah, it's pretty intense. You know, there's a lot of concentration in the top three stocks, the top seven, the top 10. But actually globally, if you compare this to other stock markets around the world, the US has one of the least concentrated stock markets in the world.

9:36If you compare it to like Switzerland, or if you compare it to Japan, or if you compare it to UK, it's actually just not that concentrated. And yes, the order of magnitude is different because, you know, NVIDIA is a$2 trillion company. But nonetheless, just go again, like drawing a direct line between level of concentration and chance of market crashing is like a really kind of intellectually difficult thing to do, because this is a global phenomenon and it's not a new phenomenon. Yeah, no, I think that's right. I actually have no more to say. I just agree with that. I just agree. All right, let's move to point number five, which I think we've referenced a couple of times here, which is about the economy.

10:18That is, I think, just lending another leg of support to this rally. You know, I don't think the economy is quite as strong as it's been in previous quarters, but it's sturdy. We're putting up strong jobs numbers. We're putting up strong activity data. I believe GDP tracking estimates are in the high twos or low threes, depending on what you look at. You know, this is an economy that is chugging along and it's inviting kind of predictions. This is kind of related to the AI point about a possible productivity upcycle. And this is the idea that, you know, a combination of strong fixed investment and a tight labor market and maybe even a little bit of help from AI, some new technology could lead to the US economy getting just better and better at growing.

11:01And you saw something like that in the 1990s when companies were kind of adopting IT en masse. You saw a big uptick in the productivity data. We've had three quarters of good productivity so far. It's noisy. It's early. Hard to say. But I think that's just lending to some of the economic bullishness, which then kind of forms the foundation for some of the stock market bullishness. Yeah, this is where like a lot of the points that we've been talking about all kind of collide into one thing in a way is But, you know, as I mentioned, there are some quite high profile kind of market pontificators out there who seem to think that as partly as a result of this massive productivity boost that the whole economy can experience through AI.

11:39You know, maybe it's not that we don't get a hard landing. It's not that we don't get a soft landing. Maybe we don't get a landing in the U.S. economy at all. So let's have a look at like some of the people who are being, you know, strikingly optimistic. Larry Summers, former U.S. Treasury Secretary, and comfortably the noisiest bearer of them all this time last year, saying, you know, a recession in the U.S. is an absolute nailed uncertainty. Got that wrong. Now he's saying there's a meaningful chance, about a 15 percent chance that the Fed might actually raise rates next time around because the economy is just doing so great.

12:18If that doesn't give you pause for thought, nothing will. But, you know, similarly, you've got Torsten Slock, chief economist at Apollo, saying, I just don't think we're going to get a cut from the Fed this year. The economy is re-accelerating. And even Dr. Doom, Nouriel Roubini, is saying. Dr. Doom. Dr. Doom. Dr. Doom has become, in some sense, Dr. Boom. He's saying perhaps there's no landing for the economy this year. And then he's saying, and I'm not going to argue with him. You know, he's a bright guy. He knows a lot more than me about economics. But he's saying that is probably bad for stocks if rates are going to stay higher.

12:55Now, currently, it's difficult to see that relationship in the market right now, but he could be right further down the line. He famously predicted the crash of 2008 after all. So, yeah, just the fact that you have got this chorus of voices saying no landing, no cuts, maybe even a hike from the Fed. This is just such a massive change of tune from everybody. And just standing in the way of what markets are doing at the moment is like you're going to get run over. Yeah. No, I think that's absolutely right. But it is our journalistic duty, Katie, to say at least one negative thing about this rally.

13:31So how about you give one and I'll give one. What gives us some pause or some cause for concern or, you know, tempers our bullishness here? Well, you've already had mine. Larry Summers says there's a meaningful chance. Contrarian indicator. Yeah, yeah. He's got to be a reasonably reliable contrarian indicator at this point. Well, I guess the one I would give is just where valuations are at, right? I think US stocks on a kind of forward price earnings basis have gone from, even if you take out the MAG7 and look at the rest of the 493, have gone from fair to now, I think, pretty clearly on the expensive side.

14:07Maybe that expensiveness reflects good news. But I think what we know about elevated valuations is it reduces your kind of expected return, right? Especially if you're buying in at those elevated valuations, that's where maybe your five-year returns don't look as good. I think it's the type of market where if you're already holding, there's no reason to sell. I don't think you need to get out or anything like that. Not investment advice, not investment advice. Yes, caveat emptor everywhere. But if you're someone buying into the market now, I think it's understandably a little bit nerve wracking to be buying in at the elevated valuations we're at.

14:45You know, then again, if you'd bought in 2020, you now would be enjoying the new, fresh all time highs every day in the S &P 500. God bless. One little thought to leave you with here is, yes, we've got all time highs in the S &P 500, but actually real returns, if you take inflation into account, you're just about back to flat from the all time high in November 2021. So, you know, if you are a sort of longish term holder, you've been in the market for at least 18 months or so, you're just about back on terms. So that's the thing that really matters is when you look at inflation and at the rate at which the market is growing.

15:22So, you know, on that basis, we're just not at whiz bang levels yet. Katie, I got to add whiz bang to our growing unhedge dictionary of Katie-isms alongside Pete Tong, hell's teeth. Yeah, I do say that quite a lot. yeah oh it's all gone pear-shaped that's another one it's all gone pear-shaped i think you said that on the show with rob last week yeah did i this sounds like me fine guilty as charged all right katie we'll be back in a moment with long short

15:56welcome back this is long short that part of the show where we go a long thing we love short a thing we hate i can't believe i haven't said that in a week it doesn't feel right katie i am long this podcast. A friend of the show, Toby Nangle, posted this on Twitter a couple of days ago, which I really appreciated. He posted a chart of Google searches for Magnificent Seven stocks. And understandably, in the back half of last year, you saw the chart go up, and it's been pretty high in the last couple of months too. But Toby annotates on this chart, right around June, July, 2023, FT Unhedged podcast makes first mention of the Magnificent Seven, right as the activity started to take up.

16:34We were a huge leading indicator for chatter about the Mag 7. So Google, Microsoft investors, you're welcome. Yes. I'm long. I don't feel like we invented that term, but... No, definitely not. So help me, I'm happy to take credit for it. Thank you, Toby, for giving us credit. We definitely don't deserve it, but we appreciate it nonetheless. Katie, are you long or short something? I'm short something. As I'm sure you're aware, Ethan, it's the UK budget tomorrow. There's this frisson of terror that hangs over the kind of big announcement of government tax and spending plans. After that time, it all went spectacularly badly wrong at the end of 2022.

17:12Everyone says it's going to be fine. The new-ish Chancellor, Jeremy Hunt, is not going to do anything crazy. He's not going to nuke the markets. So, you know, that does make me a tiny bit nervous. But the other thing that he's unlikely to do from the people that I've spoken to so far, their view anyway, is his big ambition is to boost the UK stock market and boost participation in the UK stock market. Unless he says something really clever, I don't think his chances are that high. I don't think he'll make it worse. But it'll be interesting to see what people make of that whole thing after he's done his bit.

17:47Yeah. I mean, we all better hope that Hunt makes good time with repairing the UK stock market and economy because I've heard, Katie, we only have 10 years to save the West. Only 10 years. This is getting quite urgent. I think there might only be nine years left. Only nine years left to save the West. Liz Truss, if you would like to be an Unhedged interviewee, please let us know. Anytime. We'd be very happy to have you on. Anytime. Anytime. All right, Katie, it's so good to be back and it's so good to have you. Thank you for hosting in my absence. And listeners, thank you for listening. We'll be back in your feed on Thursday with another episode of Unhedged.

18:22We'll catch you then.

18:53I'm Ethan Wu. Thanks for listening.

19:13Quick clarification. In a previous episode of Unhedged, we said that WeWork's Adam Newman trademarked the word we and then sold it back to the company. We just want to add that payment for the Wii trademark collection was eventually after widespread criticism reversed.