Three markets, three highs

0:06Pushkin. Okay, buckle up for a vibe shift in markets. We've been getting a miserable grind higher in stocks globally throughout this year. Record high after record high and all the kind of misery guts have been saying, it's all gone too far. But now, all of a sudden, the animal spirits are in the house. US stocks have shot to a record high, but there's also some serious good vibes going on in Europe and Japan. We're going to break it all down for you. This is the Unhedged podcast from the Financial Times and Pushkin. I'm Katie Martin. I'm a markets columnist here at the FT in London. And I am joined down the line from New York by the one and only Rob Armstrong from the Unhedged newsletter, who has returned uninjured, crucially, from a skiing trip.

0:55In investing, as in skiing, the crucial thing is don't get hurt. Do not face plant. But look, Rob, I think the key thing here that has managed to, you know, inject this exuberance into global markets, we're going to talk about how that's going on in the US, but also in Europe and Japan. What's pushed this over the line is that you weren't here. Have you considered going on holiday more often? Yeah. And, you know, that's true for investors generally. There's a lot to be said for ignoring things and just letting them run. Do not overtrade. So the benign neglect theory of the unhedged podcast, the unhedged newsletter, stock markets, marriage, all of this stuff applies.

1:49Yes. But look, it's not just like one week, right? So I was looking at some stats earlier from Jim Reid at Deutsche Bank, who was pointing out that we've had 15 weekly gains in the S &P 500 in the last 17 weeks. And it's the first time that has happened since 1989, which I'm going to say is before that Ethan Wu, who is not here this week, was born. And we've also, if we get another positive week this week, that will be 16 in the last 18 weeks where we've been up. And that will be the first time since 1971, which is before even I was born. So we really are going back a bit here. That is my birth year.

2:29I don't want to give away too much. A very special vintage. A very special vintage. So, you know, it's not really the fact that you weren't here, Rob, that has sprinkled the magic dust. It is, of course, everyone's favorite stock, NVIDIA. NVIDIA. Hell's teeth. Expectations keep rising and they keep beating those expectations. And it's like this dream version of the world economy where NVIDIA sort of has sprinkled its fairy dust all over everything else. People are talking about how productivity might be growing again. The U.S. economy at least is, in fact, growing really well. Other earnings reports are good.

3:07Everything is touched by this kind of halo covering NVIDIA. Because it's this chips monster, right? And its shares have been up like 11 million percent or whatever, you know, over the past sort of 12, 18 months. It's just been absolutely heading to the moon for the past year. And there's just been this kind of gnawing worry among investors that this is too good to be true. This stock has just gone up too much. This company is like worth like one and a half trillion dollars or something. We're just worried that the stock is getting ahead of the earnings. Almost two trillion. Well, it is two now.

3:41Yeah, it is two now. Now, what is interesting, though, is there is still a lot of talk around in the United States market that this is an NVIDIA rally or it is a tech rally or it is a big cap tech rally. But since October, when the market really started to turn around, actually everything in the United States is working. It's become an extraordinarily broad rally. Every sector of the S &P is up. industrials, consumer staples, et cetera, et cetera. There's only a few sectors, in fact, that are only up modestly. Most sectors are up like 10%. The S &P 1500, which is a very broad index, covers about 90 % of the market capitalization in the world.

4:27More than 1300 of those stocks are up. So this is a broad rally and a deep rally, small caps, value stocks, whatever, however you want to slice it, things look pretty good. In a way, though, it is kind of part of the same thing, though, right? So, you know, NVIDIA in particular, it put out its earnings numbers for the fourth quarter the other day, and it's had like a 265 % rise in quarterly earnings. It's getting orders from, you know, everyone, governments, companies, you name it. But I guess the kind of thread that links these together is that the rest of the market is catching up with these AI heavy kind of big tech stocks, because investors are starting to believe that there really could be some sort of productivity revolution that comes from AI.

5:13So the AI stocks move first, and then the rest of the market catches up with it too. Do you think that's what's behind, like you were saying, there's just this kind of rally across the US? I mean, for a while, it was like, everything has to do with rates. That was the story we had before. No one cares about rates anymore. Suddenly no one cares about rates. And what's remarkable about the latest leg of this rally is actually expectations for what the Fed is going to do have actually gotten tighter. Yeah. Right? That expected rate cuts have actually come off the table in the last month or two and still the market rallies.

5:48So if we were having this conversation six weeks ago or eight weeks ago, we would be saying, man, everybody expects all these rate cuts. Inflation is not going to go down as much as everyone expects. The market is going to be disappointed. Valuation ratios are going to fall and it will all end in tears. Inflation has surprised a bit to the upside. Rate cuts have come off the table and here we still are. Now that said, the US economy is very strong. The fundamentals do look okay. Earnings across the board, not just NVIDIA, have been pretty good. But anyway, it shows you how narratives can change.

6:23It really does. And so, you know, literally like, I don't know, 10 days ago or something, I wrote a column about how people were starting to warn that irrational exuberance was starting to leak into markets, that there was this kind of late 90s feeling about a kind of dot-com boom and bust that was settling into US markets in particular. All of a sudden now, you know, for example, Christina Hooper at Invesco, chief strategist there, is talking about this is actually rational exuberance. You know, the results from NVIDIA, I don't mean to keep like banging on about them, but they have just given a whole new logic to what's happening here.

7:03You know, these things are grounded in reality. And that, I guess, is kind of what's, that's what's turned the key. Yes, we are kind of at everyone's happy phase in the market. That's not decisive, but it's a part of the puzzle. The thing is, everyone is happy everywhere. I know you Americans can't bring yourself to imagine that other countries exist, But there's this thing called Europe. Yeah, and it's doing very well. It's doing very nicely. Thank you. So the stock 600 index is up about 7.5 % so far this year. Decent. It tickled another record high the other day. Rob Armstrong, have a guess why.

7:37Have a guess what pushed it over the edge. Is it NVIDIA?

7:44It's funny you should mention. But even though NVIDIA did sort of create this kind of global surge in markets, you know, Europe's kind of got a bit of swagger about it now. And you know why? Everyone's talking about it, Rob. Get behind it. It's the granolas. I hate this acronym already. Lay it out for me. So Goldman Sachs, which seems to have like an entire team of people who come up with slightly lame acronyms for things, came up with the granolas a little while ago. Anyway, it's stuck. Are you ready? These are the components of the granolas. GSK, Roche, ASML, Nestle Novartis Novonordisk, L 'Oreal, LVMH, AstraZeneca, SAP, Sanofi.

8:31Trips off the tongue, right? It really does. Although, two comments about that. One, we should pronounce it granolas because there's three N's in the middle, which is cheating. That's point number one. And two, isn't granola kind of American? Shouldn't the acronym be MUSLY if it's European? Details, details. The point is, you know, you've got your magnificent seven. That's great. That's fine. Europe has got the granolas. And do you know what? They've done just as well as the MAG seven over the past few months, but with much lower volatility. So if low vol is your thing, then Europe is the game.

9:07And they're probably much cheaper. Funny you should mention. Got it written down right here. Yeah, they trade at about 20 times forward earnings compared to something like 30 for the Mag7. So, you know, Europe is also definitely having a moment, even though the, you know, various bits of the Eurozone economy are not exactly firing on all cylinders. Yeah. Markets are doing pretty well. And there's only two stocks in there that have an obvious connection to AI hysteria. Yeah. SAP, I'm sure, is selling its little boots off, saying how its business management software is going to be automated. And then you have ASML, which sells the tools that cut the chips that make AI possible.

9:49ASML is the most incredible company that far too few people have ever heard of. Like, they absolutely boss the chip space. Yeah, they make tools that nobody else can make, and they cost a gazillion dollars, and you just have to have them if you want to make chips. If you want to make chips. Brilliant company. Everyone wants chips. Yeah. So look, Europe's having a good time. We must turn our eyes to Japan, where the Nikkei 225 index, finally, it took 34 years, but it finally got back to a record high. There were, the FT reported, whoops and cheers on trading floors when the record was struck. Rob Armstrong, would you like to have a bet what the catalyst for hitting the record high was?

10:35Could it possibly be NVIDIA? It may have had something to do with it. We all know the kind of bullcate. A lot of chip companies in Japan. A whole lot of chips. So the index went through 39 ,000 last week. Bank of America is saying it's going to hit 41 by the end of this year. There's a lot of chip companies in Japan, but the argument for buying Japan is pretty well trodden at this point. You know, there is this big new focus on kind of shareholder engagement and on old fashioned stuff like actually being profitable and on consolidating a lot of the kind of very confusing cross shareholdings. Plus the economy is coming out of COVID in a delayed way, but it's really finally happening.

11:21It's got the inflation that it's wanted for years and years and years. You know, it's all going on for Japan. It becomes attractive as a proxy way to play China when Chinese stocks stink for a whole lot of different reasons. Those Japanese, the Japanese companies have a lot of exposure to the Chinese market without having the worst characteristics of that market. So that's an important part of the story as well. So Europe, good. Japan, good. Katie, I mentioned China, but there's one more market wearing a dunce cap still. Do you know which one that is? No. It's the UK, Katie. It's amazing. Like, you know, a year ago, everybody was like, in relative terms, UK stocks are unbelievably cheap.

12:07This can't go on forever. Let's buy UK stocks. They have just not. I mean, what is wrong with your home market, Katie? I think you need to go on vacation like I did. I definitely need to go on vacation. So, Rob, joy and happiness everywhere, but I am a miserable Brit and a journalist, so I have to ask, you know, is all of this a little bit too good to be true? Let's go through some negative scenarios. Not that we necessarily buy any of them, but the first negative scenario was that on some earnings announcement from NVIDIA, some well-meaning NVIDIA executive says that maybe at some point in the future, earnings might not be up by quite as much as they have been up so far.

13:04Maybe a little under the 265 % we saw last time. So, in theory, a fairly small shadow of decelerating growth at NVIDIA could cast a pretty decent-sized shadow over big chunks of this market. So, that's not very hard to imagine. As we mentioned before, sentiment is very high, which is overall makes markets a bit more fragile. I mean, stocks are a bit expensive in historical terms, but as we never tire of saying it unhedged, rallies don't stop because stocks are expensive. Something else has to happen. So stocks can always keep on getting more expensive until some awful things happen. I mean, I guess the tastes of resurgent inflation we've gotten so far have been very mild.

13:54And you could see a situation where you actually get a truly nasty inflation report. Maybe. Which makes people doubt the central bank's cutting rate story. And that puts a scare into you. But I'll play the part of the optimistic American. You know, all the stuff we've just mentioned aside, this looks like a pretty solid risk asset rally to me. But, Rob, you spent some time living in the UK. So are you familiar with the football chant that we have with, oh, and it's all gone quiet over there? and you know you you score a goal you know you grind your opponent's face in the dust you say it's all gone quiet over there and that's kind of what's happened with with these nvidia results because they are just so good that it has totally silenced the bears they have gone pretty quiet yeah i think you were coming back to sentiment here and you want to buy stocks when the bears are roaring not when they're silent yeah and that that i think that's the that's the thing that if if anything has to spook you, that's it.

14:59But again, you look at the strength of the economy, the strength of earnings, the depth of the rally. It's hard to be miserable. You English people really have to work hard at it. You have to put on like two Morrissey albums at once and drink cold tea or something and then that'll do it. Yeah, I'm sure we can manage it. Now, Rob, we want to hear from our listeners, don't we? Yes, we are planning to do a show in which we respond to readers' questions. So if you have questions, send them along to robert.armstrong.ft.com, and we will make you famous on the Unhedged podcast. You can also be anonymous if you want.

15:43We don't have to make you famous, but we're offering to if you'd like that sort of thing. Feel free to ask silly questions as well. There's no such thing. Speaking of silly questions, we're going to be back in a minute with Long Short.

15:57Okay, now it's time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. I am short something this week, Rob, and it is the gilet. The gilet. What is this strange European word? Is that a kind of mushroom? What is that? You know that thing that like bankers and hedge fund managers wear, where it's like a kind of padded coat, but it's got no sleeves. The dreaded fleece vest. Like, why have you, you write so much about fashion, why have you not killed the gilet? I've tried, believe me. It is like gilet season in Europe. Believe me, it's like a movie monster that keeps not dying, even after the steak has been driven to its heart and it's been set on fire and it's been pushed off a cliff.

16:42The gilet, as I just learned it is called in Europe, just keeps crawling out and trying to kill the hero again. Not only will it not die, but a friend of the show, Louis Ashworth at FT Alphaville, wrote a post the other day about the gilet. And he mentioned there's a gilet called, and I kid you not, the Cavour Ebidah Luxury Cashmere Vest. Oh, God. Which retails for one thousand... That is the most depressing string of words I think I've ever heard in my life. No, but wait till I tell you the punchline, which is that this retails for 1 ,170 English pounds. Oh, athleisure is the worst. Athleisure is the worst.

17:23It really is. Tom Ford also apparently does a gilet for nearly 3 ,000 pounds. I don't get it, Rob. Make it stop. I'm long something. I am long Berkshire Hathaway. Ooh. I know it's very conventional to be long Warren Buffett and Berkshire Hathaway, but this is actually a view that I have not held traditionally. I've generally been a bit skeptical of the Warren mystique, but looking at the stock after the most recent earnings and the performance over the last 10, 15 years, this is a stock that basically mirrors the performance of the S &P 500. But maybe it squeaks out a few extra basis points and it's a little bit more stable.

18:12And I actually find that appealing now. So I think I'm a great S &P 500 tracker fund guy. But I'm starting to think maybe it's legit to have the core of your portfolio be Warren Buffett and Berkshire Hathaway. I think it offers some interesting characteristics that maybe the S &P 500 doesn't. Not to say it's going to outperform it wildly or anything. It definitely won't. But I'm kind of warming up to it. Also, I don't think I've ever seen a picture of him wearing a gilet. Excellent point. Excellent point. That's worth like two points of PE ratio right there. You heard it here first, folks. We are going to have to leave it there.

18:57Listeners, thank you for listening. We'll be back on Thursday. You'll have to put up with me again. So tune in 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. FT 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.