Taking stock of tumbling stocks

0:00Rob Armstrong: This is shaping up to be a wild, wild week. In politics, we've had massive wins by the Democrats in the midterm elections. They won both houses of Congress in a historic sweep. And initially, markets were like, yay, maybe one day we can make markets normal again after the chaotic first half of Trump 2.0. But the good vibes in markets lasted, I don't know, 24 hours? Now, suddenly, we have massive declines in tech stocks, especially chip stocks. And you have to ask yourself, is this the big one? Is the bubble finally bursting? Listeners, it's messy out there, but it's Thursday afternoon in London, and we're going to try and figure out for you what on earth is going on and what it all means.

0:51Rob Armstrong: This is Unhedged, the markets and finance podcast from the Financial Times. I'm Katie Martin, a markets columnist at FT Towers in London. People, we are getting the band back together because joining me down the line from New York City is the big fella, Rob Armstrong. Now, Rob.

1:07Katie Martin: Yes.

1:08Rob Armstrong: I've been away. You've been away. And now we're both back and everything has gone wrong. So what I'm thinking is. Everything's gone wrong. Is it us? And more specifically, is it you?

1:20Katie Martin: It's all gone so wrong. We should just admit to listeners, it's all gone so wrong that this is the second time we've recorded this podcast. Because we basically start the podcast every morning, recording it just as the market opens. And the podcast was like, wow, the market seemed to be handling all this stuff okay. And as we were recording that first version, I was looking at the NASDAQ like, maybe it's not okay? Yeah, yeah. And it turns out it's really not okay.

1:51Rob Armstrong: Your hashtag charts on the radio are splat.

1:56Katie Martin: Yeah. No, it's really happening. And, you know, I guess the first thing to say about it is what we have seen is a massive acceleration today of a trend that has been in place for at least a month and probably more, which is a huge rotation in markets away from tech stocks, especially the tech stocks that are most involved in AI and the data center construction boom and towards more defensive sectors. So this isn't a market reversal we're seeing right now. And as of this recording, the NASDAQ is down 4%, but it touched down 5 % earlier. And who knows where it'll be by the end of the day. maybe it will all recover and we can record a third podcast i'm not doing any more listeners we're just gonna have whatever happens if the market opens if the market closes up at the end of the day today whatever i don't sorry

2:56Rob Armstrong: yeah so just to give listeners a sense of this kind of neck snapping kind of turnaround here that the initial reaction to the midterm elections was first of all great we have a clear result We're not arguing about the results for weeks and months at a time. It's very clear that the Democrats have got both houses of Congress and loads of state elections too. But also, you know, one of the big things that voters were saying no to in the States was this war in Iran. They were like, we're done with this thing. We don't like the inflation. A lot of the inflation comes from the war. Just knock it off already.

3:32Rob Armstrong: And everyone agrees that the war was a really big part of what voters were objecting to. And so that brings down the oil price. That's good for stock markets. Everyone's happy. Everything's lovely. But the other thing that was really important in the midterm elections was lots of candidates, both Democrats and Republicans, ran on a ticket of saying, we don't like AI. And specifically, we don't like these massive data centers, you know, guzzling all the water, guzzling all the energy. So I believe there was about 40 items. 41 items on ballots.

4:12Katie Martin: Looking at a CNBC story here, it says 41 data center related ballot measures were up for a vote in 2026 in 10 states. And all but one of them passed.

4:24Rob Armstrong: Yeah. Which means like voters are just like, nope, I do not wish to have this large data center within shooting distance of my house. Thank you very much. so um so this has always been one of the big risks to the ai trade right so i think if you look at you know is ai a bubble i don't know this thing has had various wobbles over the past few weeks and maybe this one will correct itself too but i think we're all beyond the point where we argue that the technology itself doesn't work right we get that it works yeah you know there's no doubt about that, whether you're making a cat video or filling in your tax form or whatever it is, the technology has really helped.

5:07Rob Armstrong: Stuff works. Yeah, stuff works.

5:08Katie Martin: Correct. But it can still go

5:13Rob Armstrong: wrong in the sense that there's an awful lot of borrowed money that's gone into building these data centers. And even if a technology works, if it can't make money, then how are you going to pay that debt back? And if you can't build the damn data center because the politicians won't let you, game over. Yeah.

5:33Katie Martin: No, it's really tough. And by the way, even if the technology does make money, it matters when it makes money. You know, and that's been the story of previous technological revolutions, is you know what made a lot of money? The internet. You know what we had in 2001? A market crash based on internet stocks. You know? Yeah.

5:57Rob Armstrong: So, you know, the timing,

6:00Katie Martin: of the revenues and the timing of the financing and the timing of the market action have to all fit together roughly speaking yeah or you have some really unpleasant days and it feels like we're having one of those unpleasant days today we're getting the great puke moment on this stuff today it's like we're we're seeing the market go through the these uh you know digesting of this the Blue Nami, as people are calling it.

6:30Rob Armstrong: Blue Nami, I like that.

6:31Katie Martin: Isn't that nice? Yeah. Blue Nami. So like yesterday, it was like, phew. Whether I like this market response or not, I know what it is. It's not contested. I can plan for a future that, as you suggested in your introduction, is maybe more predictable than the present I've been living in. All this kind of good stuff. uh the oil price is coming down quickly which is a general uh boost to everyone's mood and then now we're in the second stage where we're like oh yeah but this other thing yeah

7:11Rob Armstrong: oh that thing yeah but so um as you say uh the nasdaq which is the tech heavy u.s stock index that's down hard like four or five percent yeah but i know like four or five percent may not sound like a huge amount to normal people, but in one day, so you know, this is bad. This is bad with a capital B. But some individual stocks are getting smoked, aren't they?

7:35Katie Martin: So Sandisk, which makes memory hardware, which is very important for data centers, is down 17 % today. In one day? In one day. And it is now down 60 % from its peak of a month or two ago. No like it. Actually, more than a few. but it's yearly high. Western Digital, all these names, advanced micro devices, the chip company's down 14 % today. Marvel Technology has done 13%, another chip company, and you can just go down the list like this. So it's clear what is happening, that a major sector of the stock market is being repriced significantly as we watch. This started a month ago. It is picking up now.

8:21Rob Armstrong: Yeah.

8:21Katie Martin: The interesting question is, And you raised the issue earlier. Is this the big one? And the question is, does this change from a painful and very fast rotation between sectors of the stock market, which is what we saw up until today, and turn into a general flight from risk? where like Joe Sixpack or Jane Sixpack, who has their money in an index fund, is like, you know what? I've had a pretty good five years. How about treasuries?

8:58Rob Armstrong: Yeah, yeah. But I mean, I don't think we've seen that yet. I'm going to buy the dick in bonds. And that's going on right now. So it was very notable to me that yesterday, the immediate sort of day one of the midterms market reaction, oil fell really hard. But bond yields did not fall down hard with them, which is quite unusual. And it says, yeah, this is the market's way of saying we think the inflation that comes from the higher oil price after the start of the war in Iran is still working its way through the system. Fine. OK, I can correct. I can make sense of that. But now bonds are picking up pretty quickly in price.

9:37Rob Armstrong: Borrowing costs are coming down quickly. And that is the market's way of saying, whoops, Silicon Valley, we have a problem.

9:45Katie Martin: I think that's right. So the 10-year yield is off six basis points today. The five-year yield is off seven basis points today. These aren't huge moves, but it's not nothing, as you were about to say. I'm sorry to cut you off. So I think these are moves, if we see those moves accelerate in a kind of flight to safety way, that will be a very bad signal. But gold, for example, is not screaming higher today. It's up, but only 1 % or something like that. Gold is a weird one, isn't it? It is. So there is not a massive, if it's not nailed down, sell it kind of panic going on. It's not good. Every sector of the stock of the S &P 500 is down today.

10:32Katie Martin: That is not good. But they're not all down big. And it doesn't yet have the markings of a mama, pack your bags, we're getting out of town day. But it's a big day. And it could. This is the kind of day that turns into a general flight from risk.

10:52Rob Armstrong: Or can do. So the other thing is, right, even if this is just a problem for chip stocks, right? And it only really affects companies that have borrowed a ton of money to build data centers that they now can't build because little old ladies are lying in front of the bulldozers and they can't, they just can't build them, right? So it can start as something that's just a problem for those companies. But these things always trickle out across the rest of the market. Because if you lose a ton of money on Sandisk, because it's down 17 % in a day, what do you do to get yourself back on track? You sell something else that's actually been doing quite well.

11:32Rob Armstrong: To meet your margin call. To meet your margin call. That's what you're talking about. So that's where these things tend to have a horrible domino effect and affect the whole market. So that's the thing. The AI trade is so huge that there is no way for it to correct or fall over without coating the rest of us in brown stuff.

11:55Katie Martin: Yeah, it's true. But I'll tell you, there are some spooky things happening right now. Walmart was having a good day. That's starting to give way. That's my kind of classic defensive. The king of the large cap defensive stocks is Walmart. and that has slipped into the red. So I think, you know, I'm never the panicky type, the sky is falling type, but there are tremors here that I don't like. Yes. And if we have another couple of days like this, we're in general market route, flight to safety, risk off territory in a big way.

12:33Rob Armstrong: Yeah, because no one would be surprised, right, if the AI trade did burst. But everyone's been saying for months, this thing is just too big. It's too scary. The markets are too reliant on this one thing working out. Everyone's been looking for the moment where we have a really big correction here. But there are the other way that this kind of affects other parts of the stock market that have nothing to do with microchips is that, you know, Americans own lots of stocks. So you have this thing called the wealth effect, where if suddenly people lose a lot of money on the stock market, they're not going to go and buy that new car.

13:09Rob Armstrong: They're not going to move house. They're not going to go on that shopping spree. And so it just, like I say, it filters out across sectors that have got nothing to do with AI.

13:20Katie Martin: Yeah, it's a difficult thing because one of the reassuring things that I've been saying to myself and to others is that the U.S. economy is not as narrow in its strength as the U.S. stock market is. But you're right. The causality between those two things runs in both directions. And if you have a big enough stock market route, it can affect the real economy basically through the consumption channel, exactly as you just described. So that would be the worry in a situation like that. And that's what we'll be watching for in the next couple of days is a broadening of the stock market route, which could potentially lead to a negative wealth effect, which could affect what is otherwise a pretty solid economy.

14:06Rob Armstrong: Now, I don't want to shout fire in a crowded cinema here. These things do have a habit of self-correcting. We have had a number of these wobbles over the past few weeks. This could end up being nothing. But people who I speak to in markets who are normally very kind of level-headed and, you know, I'm sure this will go away are like, yeah, I don't know. Maybe this is actually it this time. So it gives you pause.

14:33Katie Martin: Let me say this, Katie. 20%, 30 % swings in equity markets is something that happens, right? and we haven't had one in a while outside of the pandemic before that before we had a really nasty one i think it was 2018 but this is part of the game part of the reason over history equity markets pay you six or seven percent a year is that you have to endure a change in the value of your portfolio of a quarter or a third every once in a while. And the most fundamental piece of advice about making money in the stock market over time is not to panic when that happens.

15:20Rob Armstrong: Not to panic. But at the same time, there is a whole cohort of people who are very active in stock markets right now, who certainly ever since 2022, it's just been one way traffic, and it's all been going their way. And people do get spooked quite easily when all of a sudden the mood changes. So I don't know. What's your hunch? How bad is this going to get?

15:46Katie Martin: I always say it's going to be fine. This is the kind of day that gives me the willies. Mostly, stock markets crash. Mostly they don't. At any given point of time, you're better off betting that it's not going to happen.

16:02Rob Armstrong: Yeah.

16:02Katie Martin: Right? But this is looking like a crisis, and it's looking like it's spreading a little bit. So I think we have to be cautious the next couple of days. But I think your point is right, and this is, of course, the classic point from Hyman Minsky, the economist, is that long periods of good results breed risk appetite, and they breed complacency. And so to the extent we're in danger, we are in greater danger because things have been so good for so long.

16:32Rob Armstrong: We've had it too good. We can't have nice things. That's what it is, Rob. That's just a simple fact of the matter.

16:40Katie Martin: Yeah, yeah.

16:41Rob Armstrong: For my part, I will say I'm somewhat more spooked than I have been in previous wobbles in the AI trade over the past few weeks. but this thing has incredible bounce back ability. So by the time we next record on Tuesday, because to reiterate, I'm not re-re-recording today. This is it for today. So by the time we next record this podcast on Tuesday, we'll know for sure how much doo-doo we're in. Does that sound like a decent deal?

17:13Katie Martin: Deal.

17:14Rob Armstrong: Okay, fine. Listeners, we're going to be back in one sec with Longshot.

17:25Rob Armstrong: Okie dokie listeners, 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 Armstrong, what are you saying? I am short Trump style.

17:38Katie Martin: We all know that Trump politics took a nasty shot earlier this week. But I think what we're not going to see any more of is the flamboyant, crass, brightly colored, chintzy style of the MAGA movement with its bright red ties and hats and floppy suits. I just think this election was an election that was about sobriety and institutionality and conservatism in the small C sense of conservatism. and goofy clothing for politicians is on the out.

18:20Rob Armstrong: So floppy suits are one thing, but I also feel like those very, very tight suits that Pete Hegseth wears, they were definitely on the ballot somewhere.

18:29Katie Martin: Everything about Pete Hegseth's clothing, I am short and in so far. What about you, Katie? What are you long or short today?

18:38Rob Armstrong: I'm short smart fridges. I've never seen the point of connecting your fridge to the Internet. Surely you can see for yourself whether you need more milk or more hummus. But it turns out that connecting fridges to the Internet is also a national security risk. So I'm sure you've seen there's been a few stories recently where there have been like massive hacks of fridges in European supermarkets. And the finger of blame is pointing in the direction of Russia. But, yeah, they seem to be able to turn these fridges into essentially ovens and spoil, like, shops worth of food, which is bad. So fridges, new Cold War, you get the idea.

19:20Rob Armstrong: I'm anti putting fridges on the Internet.

19:24Katie Martin: This is actually the Cold War turning hot, actually, I think is what you're looking at here.

19:28Rob Armstrong: Yeah, but if you are a person who operates a fridge on the Internet, for the love of God, change your password and bring in two-factor authentication or whatever it's called. If I could do it on my laptop, you could do it too. Listeners, make sure you stay disconnected from the internet of things. And hopefully, barring total disaster, we'll be back in your ears on Tuesday.