Transcript: Three markets, three highs

This is an audio transcript of the Unhedged podcast episode: ‘Three markets, three highs’

Katie Martin
OK, 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 gods 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 gonna 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.

Robert Armstrong
In investing, as in skiing, the crucial thing is don’t get hurt.

Katie Martin
Do not faceplant. (Laughter) But look, Rob, I think the key thing here that has managed to, you know, inject this exuberance into global markets. We’re gonna 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. (Laughter)

Robert Armstrong
Benign neglect.

Katie Martin
Have you considered going on holiday more often?

Robert Armstrong
Yeah. And you know, that’s true for investors generally. There’s a lot to be said for ignoring things and just having them run.

Katie Martin
Do not overtrade.

Robert Armstrong
So the benign neglect theory of the Unhedged podcast, the Unhedged newsletter, stock markets, marriage — all of this applies. Yes.

Katie Martin
Yes. 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’s happened since 1989, which I’m gonna 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’ll 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.

Robert Armstrong
That is my birth year. I don’t want to give away too much, but . . . 

Katie Martin
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 favourite stock: Nvidia.

Robert Armstrong
Nvidia.

Katie Martin
Hell’s teeth!

Robert Armstrong
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 US economy at least, is in fact growing really well. Other open earnings reports are good. Everything is touched by this kind of halo covering Nvidia.

Katie Martin
Yeah. Because it’s this chips monster, right. And its shares have been up like “eleven-ty” million per cent or whatever, you know, over the past 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 $1.5tn or something. We’re just worried that the stock is getting ahead of the earnings.

Robert Armstrong
Almost $2tn.

Katie Martin
Well, it is two now.

Robert Armstrong
Yeah, it is two 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 per cent. The S&P 1500 — which is a very broad index, covers about 90 per cent of the market capitalisation in the world — more than 1,300 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.

Katie Martin
In a way though it is kind of part 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 per cent 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. So 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?

Robert Armstrong
I mean, for a while it was like everything has to do with rates. That was the story we had before. 

Katie Martin
Right. No one cares about rates anymore.

Robert Armstrong
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. So 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 gonna 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 OK. Earnings across the board, not just Nvidia, have been pretty good, so . . . But anyway, it shows you how narratives can change.

Katie Martin
It 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 dotcom boom and bust that was settling into US markets in particular. All of a sudden now, you know, for example, Kristina 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 banging on about them, but they have just given a whole new logic to what’s happening here. You know, these things are grounded in reality. And that I guess, is kind of what’s turned the key.

Robert Armstrong
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.

Katie Martin
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.

Robert Armstrong
Yeah. And it’s doing very well.

Katie Martin
And it’s doing very nicely, thank you. So the Stoxx 600 index is up about 7.5 per cent so far this year. Decent. It tickled another record high the other day. Rob Armstrong, have a guess why. Have a guess what pushed it over the edge.

Robert Armstrong
Is it Nvidia? (Laughter)

Katie Martin
(Laughter) You know it’s funny you mentioned but even though Nvidia like 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”.

Robert Armstrong
I hate this acronym already. Lay it out for me.

Katie Martin
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 stock. Are you ready? These are the components of the Granolas: GSK, Roche, ASML, Nestlé, Novartis, Novo Nordisk, L’Oréal, LVMH, AstraZeneca, SAP, Sanofi. Trips off the tongue, right? Granolas.

Robert Armstrong
It really does. Although two comments about that: one, we should pronounce it “grannn-olas” because there’s three Ns in the middle, which is cheating. That’s point number one. And two, isn’t granola kind of American? Shouldn’t the acronym be muesli if it’s European?

Katie Martin
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 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.

Robert Armstrong
And they’re probably much cheaper.

Katie Martin
Funny you should mention. Got it written down right here. They trade about 20 times forward earnings compared to something like 30 for the Mag Seven. 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, markets are doing pretty well.

Robert Armstrong
And there’s only two stocks in there that have an obvious connection to AI hysteria: 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.

Katie Martin
ASML is the most incredible company that far too few people have ever heard of. Like they absolutely boss the chips space. Incredible.

Robert Armstrong
Amazing. Yeah. They make tools that nobody else can make, and they cost a gazillion dollars and you just have to have them if you wanna make chips.

Katie Martin
If you wanna make chips, and everyone wants chips. So, look, Europe’s having a good time. We must turn our eyes to Japan, which 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? 

Robert Armstrong
Could it possibly be Nvidia?

Katie Martin
It may have had something to do with it. We all know . . .

Robert Armstrong
A lot of chip companies in Japan.

Katie Martin
A whole lot of chips. So the index went through 39,000 last week. Bank of America is saying it’s gonna 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 that . . .

Robert Armstrong
Plus the economy is coming out of Covid in a delayed way, but it’s really finally happening.

Katie Martin
It’s got the inflation that it’s wanted for years and years and years. You know, it’s all going on for Japan.

Robert Armstrong
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?

Katie Martin
No. So um . . . (Laughter)

Robert Armstrong
(Laughter) 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. This can’t go on forever. Let’s buy UK stocks. (Makes buzzer sound) They have just not. I mean, what is wrong with your home market, Katie?

Katie Martin
You know, we’re (inaudible).

Robert Armstrong
I think you need to go on vacation like I did.

Katie Martin
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?

Robert Armstrong
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.

Katie Martin
Maybe a little under the 265 per cent we saw this time. Yeah.

Robert Armstrong
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 at 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. And you could see a situation where you actually get a truly nasty inflation report which makes people doubt the central bank’s cutting rates 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.

Katie Martin
But, Robert, you spent some time living in the UK. So are you familiar with the football chant that we have which is “Oh, and it’s all gone quiet over there”. And, you know, 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 these Nvidia results, because they are just so good that it has totally silenced the bears. They have gone pretty quiet.

Robert Armstrong
Yeah. I think you were coming back to sentiment here and you wanna buy stocks when the bears are roaring, not when they’re silent. And that, I think that’s the thing that if anything has to spook you, that’s it. But again, you look at the strength of the economy, the strength of earnings, the depth of the rally. 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 will do it.

Katie Martin
(Laughter) Yeah. I’m sure we can manage it. Now, Rob, we wanna hear from our listeners, don’t we?

Robert Armstrong
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.

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You can also be anonymous if you want. We don’t have to make you famous, but we’re offering to if you like that sort of thing.

Katie Martin
Feel free to ask silly questions as well. There’s no such thing. Speaking of silly questions, we’re gonna be back in a minute with Long/Short.

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OK, 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.

Robert Armstrong
The gilet? What is this strange European word? Is that a kind of mushroom? What is that?

Katie Martin
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.

Robert Armstrong
The dreaded fleece vest.

Katie Martin
Like, why have you . . . You write so much about fashion. Why have you not killed the gilet?

Robert Armstrong
I’ve tried, believe me.

Katie Martin
It is like gilet season in Europe.

Robert Armstrong
Believe me, it’s like a movie monster that, like, keeps not dying even after the stake has been driven through its heart and it’s been set on fire and it’s been pushed off a cliff. The gilet, as I just learned it is called in Europe, just keeps crawling out and trying to kill the hero again.

Katie Martin
Not only will it not die, but 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 EBITDA Luxury Cashmere Vest, which retails for . . . 

Robert Armstrong
Oh, God. That is the most depressing string of words I think I’ve ever heard in my life.

Katie Martin
No, but wait till I tell you the punchline, which is that this retails for £1,170.

Robert Armstrong
Oh. Athleisure is the worst.

Katie Martin
Athleisure is the worst.

Robert Armstrong
It really is.

Katie Martin
Tom Ford also apparently does a gilet for nearly £3,000. I don’t get it, Rob. Make it stop.

Robert Armstrong
I’m long something. I am long Berkshire Hathaway. 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 sceptical 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. And 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 gonna outperform it wildly or anything. It definitely won’t, but I’m kind of warming up to it.

Katie Martin
Also, I don’t think I’ve ever seen a picture of him wearing a gilet.

Robert Armstrong
Excellent point. Excellent point. That’s worth like two points of P/E ratio right there.

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Katie Martin
You heard it here first, folks. We are gonna have to leave it there. Listeners, 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 Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clark, Alastair Mackie, Gretta 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/unhedgedoffer. I’m Katie Martin. Thanks for listening.

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