This is an audio transcript of the Unhedged podcast episode: ‘Boring but sexy (stocks)’
Katie Martin
I sense a disturbance in the force. It’s hard to know when you’re in the middle of markets shifting from one mode to the next, but it really feels like that might be happening now. The reason, of course, is Nvidia, the chipmaker, put out some decent results last week.
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In fact, to be honest, it put out some pretty extraordinary results last week. But investors are just not lapping it up like they used to. The stock is already up by eleventy bazillion per cent this year and it’s kind of stalled. So today on the show we’re asking, are boring stocks sexy now?
This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m Katie Martin, a markets columnist here at FT towers in London, and I’m joined by that guy in New York who writes about men’s fashion in the FT sometimes, Rob Armstrong, who is also head honcho of the Unhedged newsletter. Rob, how do you feel about boring? Is boring good?
Robert Armstrong
I am the living embodiment of how sexy boring can be. The only reason I was able to get married at all.
Katie Martin
Yeah.
Robert Armstrong
I really think you put your finger on it. The problem markets . . .
Katie Martin
Should we just wrap it up now? (Laughter)
Robert Armstrong
Yeah, he nailed it in the intro. Let’s quit now.
Katie Martin
So let’s just very quickly talk about how good the news was from Nvidia. Nvidia, for anyone who is lucky enough not to have paid attention to this, is like this incredible success story of a chipmaker that’s become like this gigantic company not exactly overnight but . . .
Robert Armstrong
Biggest company there ever was in dollar terms.
Katie Martin
It’s just extraordinary. And so last week, it put out some earnings numbers and is very much riding the artificial intelligence wave. And it said that its revenues have more than doubled to $30bn. Like, that is a chunk of change. And it says in the next quarter we’re gonna make $32.5bn. And the market’s like, well, can there be more? Maybe, you know . . .
Robert Armstrong
Yeah. We were hoping for better from you. Looking for improvement.
Katie Martin
We’re a little disappointed. I mean, what do they want, blood? This is ridiculous.
Robert Armstrong
Must apply self, says the report card.
Katie Martin
Must try harder.
Robert Armstrong
Good news is not good enough. Katie. We need unbelievably good news not just for Nvidia, but for stocks like Microsoft as well, you know, other AI names, including Google maybe too. There’s been so much good news — that’s been priced into the stocks — and now we need unbelievable news to make these stocks move, which raises a tricky question, which is: what makes the market go up, if not these guys? Let us think back to miserable March of 2020 when we all thought Covid was gonna end the world. Since then, the market has doubled and about half of the gains in the market in terms of value, in terms of dollars have come from the Magnificent Seven stocks, the Big Tech stocks. Thirteen per cent of the gains came from Nvidia alone.
Katie Martin
Craziness.
Robert Armstrong
Nvidia has added $3tn in value over that period. So who’s next is the question. Next person up, who is that next person? And it’s a tough question because we’re so used to this tech theme, this AI theme. Where are we going next?
Katie Martin
So this feels a little bit to me like the law of like large numbers, right? It can’t just keep doubling, tripling forever. At some point, unless this is going to become like a $10tn company by the end of the year, then something has to give, right? But are you convinced that this is kind of it for the tech leadership in markets? Or do you think this is just a bit of a sort of summary head fake?
Robert Armstrong
These stocks were actually on standard metrics of valuation. These stocks a year or two ago weren’t terribly expensive because their earnings were so strong and their earnings were growing so quickly that the valuations looked like kind of like normal stocks. That is not true any more. Now they’re just plain expensive stocks. Nvidia is trading at over 30 times earnings and it’s like, yeah, we need . . . You know, they have priced in a very, very big future. So it’s important to emphasise we’re not talking about AI coming to an end or tech becoming less important or whatever. We’re talking about what’s in the price. And the answer right now is a lot.
Katie Martin
A lot is in the price.
Robert Armstrong
A lot is in the price. So something else, you know, if the index as a whole, whether it be the S&P 500 or the entire market is gonna continue to mark up gains, maybe we shouldn’t look to these names to be the ones that drive it. But I should say that it’s not true that the Magnificent Seven as a group have all sort of peaked. So Nvidia peaked back in June. And it’s been kind of sideways to slightly down since then.
The Big Tech stock that has done quite well since June is Apple. And my pet theory about Apple is that it is now a defensive stock. It’s like the equivalent of a consumer staples stock in investors’ eyes. So if you’re like a little worried about how the world is shaping up and you don’t know how the rate cuts are gonna go and maybe the economy confused you a little bit, Apple is a logical stock to buy because a lot of people have Apple phones. No one will ever stop using Apple phones because it’s such a hassle to switch.
Katie Martin
Once they’ve got their hooks in. I’m an Android girl, I gotta say.
Robert Armstrong
Yeah, you somehow don’t have the infection, but everybody else has the Apple fever and there’s no way . . . and there is no cure. So they figure the service revenue keeps coming in forever. There’s a, you know, and it doesn’t matter if nobody else ever buys an Apple phone. It’s just an annuity that will run forever now. So that stock has actually done quite well.
Robert Armstrong
Other stocks that have done quite well, let me just continue rhapsodising on this theme. Other stocks that have done quite well since Nvidia has stopped performing so brilliantly. Berkshire Hathaway — I mean, boring is sexy. I mean, who’s sexier than Warren Buffett?
Katie Martin
No one.
Robert Armstrong
(Inaudible) for. The king of boring.
UnitedHealthcare, you know, health insurance. ExxonMobil, Walmart, JPMorgan Chase. So these stocks, boring stocks have done us pretty well this summer, basically.
Katie Martin
Yeah. And, you know, so on the one hand you could look at this and say, you know, oh my goodness, everything is terrible. The AI stocks aren’t doing the heavy lifting any more. This is all awful. But it doesn’t strike me that that’s the mood in markets at all. Actually, what investors are saying is, oh thank God. Finally, we can stop relying on this tiny number of stocks to do all the hard work and the rest of the market, all these other companies that are gonna be beneficiaries of AI because they’re gonna actually use it to enhance their productivity. Although every time I come into contact with AI, I think it’s rubbish. I don’t know if it’s just me, but, you know . . .
Robert Armstrong
But it will not be rubbish soon. Soon it will not be rubbish.
Katie Martin
It will be less rubbish. So, you know, this is a very healthy development, right?
Robert Armstrong
Yeah, I think that’s right. The concentration of the market before June was scaring everybody. And one can only imagine the frustration of people who are paid to manage money when there is literally one trade out there. Like either you’re overweight AI or you’re about to get fired. Those were the options for money managers.
Katie Martin
And you can’t overweight something that’s already 26 per cent of the index unless you’re insane. Yeah.
Robert Armstrong
Yeah. And now other stuff is working. The best-performing sector in the S&P 500, Katie, since June: real estate. I mean, the reason that’s done so well is pretty clear. People think rates are gonna fall.
And when rates were high everybody thought a lot of real estate companies were gonna go out of business because they couldn’t make their interest payments. And now they might get to live. So those stocks have really jumped on the possibility of life. But, you know, it’s utilities, it’s financials, it’s healthcare. And so, you know, if you were positioned well in those spaces, you’ve been performing well. And remember it’s not like the index is falling. The index is near highs.
Katie Martin
Yeah. We’re still sort of very close sort of tickling another all-time high, right?
Robert Armstrong
Yeah. Cruising along, you know. But I will say we have had so many exceptional years in a row. So as you know, Katie, the very long-term average real return for the stock market is like six and three quarters a per cent, and stock markets regress to that mean with surprising regularity. And we’ve like had all these years that are like, you know, nominal returns of 15 per cent, 20 per cent, 25 per cent, 12 per cent.
Katie Martin
You get really accustomed to things really quickly and you’re like, OK, so this is normal now, so I need my 15 per cent. Otherwise I’m gonna have to yolo it all in crypto or something to satisfy that itch.
Robert Armstrong
(Laughter) Exactly. But of course just saying things have been very good for a long time is not a sufficient reason to think things will now be bad. That’s not how it works. Just because you flipped heads three times in a row doesn’t mean flipping tails becomes more likely now. It’s still a 50-50 coin you’re flipping or whatever. But it is a bit spooky. No question.
Katie Martin
But to me, you know, the big challenge that we’re facing here is that the good thing about AI stocks like going bananas and lifting up the entire market is that it was really good for journalists because we got to call it, you know, it’s the Magnificent Seven. It’s the AI trade. It was a really easy kind of package. You know, if you open a financial newspaper, if you listen to financial TV or even watch it, you know, that was very much the thing. Had a nice little catchphrase about it. How are we gonna make boring stocks sound exciting?
Robert Armstrong
Here’s a way to think about it. We haven’t just seen Big Tech stocks do incredibly well in the last, I don’t know, five years. It’s been American stocks. It’s been big stocks. And maybe now is the time. And this has played out a bit over the last three months. Maybe now small stocks, we could have a small stock rally, which is kind of cool. We could have a value stock rally after growth stocks have been all the rage, you know, so cheap stocks might be interesting again. And international stocks . . .
Katie Martin
Rob Armstrong, are you on the brink of recommending that people buy stocks from somewhere other than the US? This is new territory for you.
Robert Armstrong
(Laughter) I’m just saying regime change can be kind of interesting. And we’ve had this incredible run for large American growth stocks. And what about small, international and value? And for listeners who don’t know what a value stock is, it basically means a cheap one, a company that the price has not run up so much. And that gives you good cash flow for your dollar.
Katie Martin
I’m just waving at you over here in British. (Laughter)
Robert Armstrong
(Laughter) Yeah, exactly. In other words, the entire country of the United Kingdom. It’s like a value . . . It’s a value country, really.
Katie Martin
I mean, yes, regrettably it is but, you know, everyone has their time to shine. And UK markets have actually been doing pretty well. So don’t knock it.
Robert Armstrong
This should be the UK’s time. Yeah. So I think there is some appeal in this. We can get excited about a small capital rally, a value rally, international emerging markets stocks, all this stuff. And of course there’s something of a fundamental back-story to all of this, which is that for a while, American interest rates were higher than the rest of the world, capital was coming to the United States. Now we’re in a rate-cutting cycle. Maybe that interest rate backdrop kind of justifies a shift in regimes. It’s a very contentious topic, but it’s a possibility.
Katie Martin
Yeah. I mean, you never know how much of a rate-cutting cycle is already priced, but something has definitely shifted.
Robert Armstrong
It feels like a shift. And you never, as you alluded to at the beginning of the show, you never quite know while you’re in it that you are living in a regime change. It’s one of these things. I know you’re a big fan of Hegel. The owl of Minerva flies with the setting of the sun, as Hegel said.
Katie Martin
Rob, this is far too highbrow, you know, for a podcast like this. Why don’t you tell us more about your friend the owl?
Robert Armstrong
Owl of Minerva is wisdom. The owl of Minerva’s wisdom and the setting of the sun is, you know, the end, later. And so you only really know what’s going on after it’s already happened.
Katie Martin
This is not what this podcast is here for, man. Like, you know, we keep it real. I have run these shores. And on the theme of keeping it real I still feel like I need in my life some sort of stupid catchphrase that we can use now that the Magnificent Seven trade is dead. We need a new catchphrase, name, something to call the boring trade. So listeners, email us robert.armstrong@ft.com, katie.martin@ft.com. Just give us a catchphrase that lazy journalists can use when we’re writing about this whole thing, please. Thank you very much.
Robert Armstrong
It’s the only kind of journalist there is, Katie.
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Katie Martin
Right there. On that note, we’re gonna be back in a second with Long/Short.
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Alrighty now, it’s time for Long/Short, that part of the show where we go long a thing we love, short a thing we hate, except I wanna do it differently. So in the allotted time that we have available, Rob Armstrong, ie, about 90 seconds, let’s settle it once and for all. Has Jay Powell, chairman of the Federal Reserve, been lucky or good? He’s raised rates up to the moon without tanking the economy. Did the guy just get lucky?
Robert Armstrong
Yeah, inflation’s over. Just about.
Katie Martin
Inflation’s over, the economy’s not dead.
Robert Armstrong
We’re about at target.
Katie Martin
Yeah. So you’ve written about this in your newsletter today. So tell us: lucky or good?
Robert Armstrong
One thing that we’re all pretty lucky at is that the pandemic ended eventually, right, so that really helped. So like the weird thing where we are all stuck in our house buying air fryers instead of going out to restaurants, that ended. And where we couldn’t work our jobs for a while, that ended. All that turned out to have a very inflationary effect. And just that being over really helps inflation go down. And, you know, a reader under my (inaudible) made a good point that like inflation went down in Japan and they didn’t change rates at all through the whole thing. They’re like at this natural experiment, right, that, you know . . .
Katie Martin
Are we all wasting our time thinking about central banks?
Robert Armstrong
There’s like how much ink have I personally spilled on Jay Powell’s decisions? And maybe it all would have happened anyway. In the US, inflation went down in part because the labour market cooled because a lot of immigrants showed up. My feeling is the chair of the Fed and the rest of us mostly just got really lucky. And that’s why inflation came down. Productivity came up a little bit. And you know, everything’s kind of came together.
Katie Martin
Central bankers are not necessarily good at making things better, but they definitely can make things worse. So I’m gonna say that there’s like not no skill. You know, there is some skill involved . . .
Robert Armstrong
Avoided grotesque error.
Katie Martin
There’s some skill involved in running the Fed. I’m saying props to Jay. I will admit that you had a bit of a kind of, you know, following wind of luck, but still.
Robert Armstrong
And I think you’ve enunciated a principle that kind of applies to life. A lot of it is not making mistakes rather than actively doing things that are good. Just like it’s like a doctor, do no harm. I think Powell has at the very least satisfied the Hippocratic Oath and done no harm to the patient. I agree with you. For that he has to be congratulated. But a lot of the patients returned to health was just circumstances and policy (inaudible).
Katie Martin
You are so here with the clever analogies this week.
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Robert Armstrong
I know. I’ve really got it going.
Katie Martin
So listeners, please don’t expect this highbrow tone to continue. Nonetheless, we will be back in your feed on Thursday so listen up 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 Clarke, 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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