Transcript: Stock market party but why?

This is an audio transcript of the Unhedged podcast episode: ‘Stock market party but why?’

Katie Martin
Stock markets are in party mode. May was the best month for the big US stocks index, the S&P 500. In a year and a half we had gains of something like 5.5 per cent.

Now, not to be a massive Debbie Downer, but people are really struggling to figure out why this is happening. Everything on some level is pretty terrible. In the past few days, that wise negotiator, President Donald J Trump, has threatened to double tariffs on steel and aluminium/aluminum, take your pick, and he’s pushing other countries for their best offers to avoid the other supersized trade taxes by Wednesday.

US debt was downgraded not so long ago, investors are worrying about deficits again and the world is waking up to the risk of additional taxes on foreign investments in the US. But as I say, party, party. So today on the show, we’re gonna try and at least attempt to figure out what is going on there and talk about what is actually happening with trade tariffs, at least today.

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin, the pod that has infamously brought the Taco trade directly to your ears. Listen to last week’s pod if you have no idea what I’m talking about.

I am joined down the line all the way from New York City by the big man, actually kind of a big deal these days, Mr Robert Armstrong from the Unhedged newsletter. And I learnt just moments ago, listeners, that he’s not allowed to wear shoes while he’s recording this podcast. Rob, what’s that about? (Laughter)

Robert Armstrong
I can’t wear shoes ’cause I kick the table and it ruins the recording. And every time, the producer, Jake, forces me to take my shoes off — it’s extremely infantilising. And so it’s like every time I do this show, it starts with a small humiliation that keeps me in my place.

Katie Martin
Rob, I’m delighted to note that you don’t think you’re too famous to talk to me any more now. But are you, like, wearing mirror shades indoors and, like, having assistants bring you yellow M&M’s and stuff these days?

Robert Armstrong
That was my life for two days — 48 hours. Last Thursday and Friday, I had a personal assistant in my own plane to take me from interview to interview. But the plane and the assistant left me and I’m just a normal guy again today. No more interviews, nothing.

Katie Martin
You’re just a normal man.

Robert Armstrong
The news cycle is just brutal, man. They just chew you up and they spit you out, Katie. Now, Katie, you said earlier that you don’t want to be a Debbie Downer. But is Debbie Downer not kind of your brand, Katie?

Katie Martin
They’re all misery guts, it has to be said. (Robert laughs) No one’s picking out yellow M&M’s for me. So yeah, OK, fair, fair, fair.

Why don’t you spin the other side of that, Rob? Why are markets so happy? Great month in May in the US. Now, I would say US markets are still only just positive on the year when the rest of the world has gone off to the races. Nonetheless, good May.

Robert Armstrong
OK, so let me just say, I did a little bit of mathematics this morning — always a dangerous proposition — and I found that almost three-quarters of the gains in the S&P 500 since the 1st of May come from the following stocks. And I’m gonna list these stocks and you tell me if they sounded all familiar, if they have anything in common. The stocks are Nvidia, Microsoft, Meta, Broadcom, Amazon, Tesla and Alphabet.

Katie Martin
I mean, it sounds like the old Magnificent Seven trade.

Robert Armstrong
Mag Seven, baby. It’s back! We’ve just gotten into a time machine and gone back to when was the Mag Seven everything — kind of like mid-last year or maybe all of last year. And it’s once again it’s those stocks that are powering the S&P 500 forward. And I don’t know exactly what to make of that other than these are stocks that have worked incredibly well over the last five years and maybe people are just going with what works, you know, they like that story. And potentially that might have something to do with the Taco trade.

Katie Martin
Walk me through that. So you think that Taco is good for Mag Seven?

Robert Armstrong
Well, you might have been worried that Donald Trump is gonna pick fights with everybody all over the world on every available topic. And the Mag Seven stocks have massive global exposures. Tesla and China is the most obvious example of that. But although they’re not goods companies as a rule, with the exception of Apple — and it’s interesting that Apple is not on that list, Broadcom’s taken its place — these are very global companies, and if you’re starting to doubt whether Trump is gonna get in these big fights with other countries, maybe the prospects for these massive American global companies are a little bit better.

Katie Martin
I don’t know. I mean, you know, lots of investors were already worried about market concentration before the tariffs went kind of gaga. So I guess if you were worried about that before, you should be doubly worrying about it now if this is the only sort of part of the market that’s pulling higher.

Robert Armstrong
Maybe that’s right, that on the Debbie Downer side of all this is we were complaining that it was a fragile market that depended so much on these things, and now we’re back into that pattern again.

Katie Martin
So . . . 

Robert Armstrong
Now, another . . . Whoa, I’m sorry. Go ahead. I feel like I have a terrible interrupting problem, or at least I hear that from my wife, and I’m trying to control it.

Katie Martin
(Laughter) Me and Mrs Armstrong, we know the score. (Robert laughs) To the extent that you are able, can you update me please on where we’re at with tariffs at the moment? I just . . . I’m almost getting bored of trying to track it because they’re on, they’re off, he’s going up again by 50 per cent, he’s going down again, the steel and aluminium thing is on, I give up.

Robert Armstrong
Steel and aluminium is on and we just got the big manufacturers’ survey results yesterday for May.

Katie Martin
We did.

Robert Armstrong
And the goods economy does not like steel and aluminium tariffs at all. The survey results weakened month to month and the comments from the survey respondents were like, please, please, don’t do this, basically, about steel and aluminium tariffs.

Katie Martin
So this is a survey that goes out to kind of, you know, business executives.

Robert Armstrong
Companies.

Katie Martin
And companies, yeah. And some of them were saying just this, the mere uncertainty over these tariffs — on again, off again, up again, down again — is creating as much . . . sort of is throwing as much sand in the gears of supply chains as Covid did even though a lot of these tariffs have never actually seen the light of day. This sounds un-good.

Robert Armstrong
Yeah, this is bad. And you saw inventory spiked a bit in the last couple of months. And that is very easy to understand. If you think big tariffs are coming down the pike, then you buy inventory before the tariffs get on. And so you have it in the warehouse.

That has now levelled off. So either the warehouses are full or companies don’t think the tariffs are gonna come or they just don’t know what’s gonna happen so they’ve given up ordering ahead. That is a slightly ominous sign inasmuch as if the warehouses are now full, we have now bought ahead of the tariffs as much as we can, if that is what is going on. Then at some point, that inventory that was bought ahead gets sold through and then they have to order at the new tariffed prices, and they have to pass those prices through to consumers. In other words, once this inventory bump we’ve seen gets consumed, then the inflationary rubber hits the road.

But again, not to be so down about it, the goods economy is not that big a part of the American economy, right? It’s a third or less; services is where the action is in America. So while we have — not a terrible, by the way, but a slightly wobbly-looking goods economy because of tariffs — the main story is the services economy, and with a few exceptions, that economy still looks OK. So there is a fundamental economic story that is pretty good in America.

Katie Martin
It’s all about the inventories, which is a bit like when I stockpiled toilet paper before Covid. I was right. I was right about that.

Robert Armstrong
And, you know, when there was the famous story of how, like, when they discontinued Tab, which was this unbelievably disgusting diet beverage in America — I don’t know if you got that — but, like, people were filling their driveways with cases of Tab so that they would have enough for the rest of their lives, or whatever.

Katie Martin
Tab and bog roll. Now, again, not being Debbie Downer but I tell you, three little numbers that are bothering people in markets at the moment are 899. There is a little bit of the One Big, Beautiful Bill, the big budget package that Trump is trying to get through. On page like eleventy million and 26, ’cause this is like a huge document, there’s this little thing called Section 899.

And we kind of touched on this in the pod the other day, but all of a sudden it’s really bugging people. And what it would do is it would say to foreign buyers of US financial assets, you’re gonna be subject to an additional tax if it is deemed that you as a country have a tax regime that’s unhelpful to the US in some other way.

That sounds not ideal in terms of, you know, the US needs foreign money. There’s a lot of foreign investors who are saying, hold up, wait a minute. I do not like this. I am not comfortable holding US assets with this sort of thing in the background. Like, how worried should we be about this?

Robert Armstrong
I think it would be good at this point to take a step back and just note how sort of structurally or philosophically Section 899 is similar to the tariffs on goods. So the king fact here, the ruling kind of reality is America spends more than it earns. This is something we’re famous for and this has become extreme in recent years and that expresses itself in a huge trade deficit, which means we, you know, we buy more stuff than we sell to the rest of the world.

And it also expresses itself in what mathematically has to be the same thing, which is a current account deficit, which is basically more money comes in than goes out, because you need to finance all that buying with someone else’s money if you’re not earning it, right? And so everybody has decided, seemingly all at once, that this very imbalanced American economy where we spend more than we earn is a bad thing. And one way you might try . . . 

Katie Martin
It hasn’t seemed to have done you any harm, like, looking from over here, but, like, whatever.

Robert Armstrong
(Laughter) It’s felt OK to me but, you know, nobody asked me. So you can do two things. You can say, let’s put a tax on imports and that way perhaps we’ll change the balance that way, or you could go to the other deficit and say let’s put a tax on inflows of capital, right? And it kind of amounts to the same thing in a way. I don’t know that either one is a good policy, but they have deep similarities.

But there is an important addendum here, which is that this Section 899, a number which I feel is intrinsically ominous for some reason, I don’t know why, it does not say we are just taxing foreign capital inflows to the United States. It says instead if we don’t like you for whatever reason, we’re gonna tax you a lot, right? We’re gonna say you have a VAT tax or you have some naughty thing we think is unfair and we’re gonna single you out in ways as yet unspecified and tax you.

Katie Martin
And is the list of affected countries going to appear like on a sort of whiteboard on the Rose Garden, like the penguin tariff?

Robert Armstrong
Yes. Who is thinking of the penguins? The penguins are sending remittances from that island to the United States, to their relatives who live in zoos in the United States. And now these remittances are gonna be taxed at a swingeing level. (Laughter)

Katie Martin
So foreign investors are saying, look, I’m not a penguin, and I don’t think I’ve done anything wrong here. And I think I’ve been lending my money to the US, which by the way, it needs because it issues so many bonds and needs so many buyers. This is like, no fair. Why am I facing a potential tax on this?

Now, my guess is this is a sufficiently disruptive idea that it will fall the way of Taco, that Trump always chickens out and that this will somehow get scrubbed from the documents and will never happen. But we have to assume at this point that it’s a serious possibility.

So given that, it is really difficult for me to justify how relatively buoyant compared to, say, the start of April, US markets are. So what it sounds like the chain of events here is the markets puked at the start of April. Retail investors in the States did what they have always done for the past few decades and they bought the dip. And God love them, it’s worked out fantastically for them, that’s been an amazing trade.

But institutional investors, particularly in Europe but even in the States are saying, nope, I’m not playing. I’m not playing until I know, first of all, what’s gonna happen at the end of the 90-day pause of the reciprocal tariffs. I am not playing until I know what the score is with this 899 thing. So I feel like there’s a bit of a kind of David and Goliath formation in markets.

Robert Armstrong
Do we really know that, Katie? I agree with you this far. The weird thing we’ve seen, not quite in the last month but in the last three weeks or so, is this pattern of dollar weakening while Treasury yields go up, which is a very rare circumstance because usually a currency’s strength is determined by the differential between its interest rates and other available sovereign interest rates. So usually when you would see Treasury yields going up, you’d see the dollar going up with them, right?

But the fact that you see Treasury yields going up and the dollar going down is strange and alarming and is suggestive of the fact, as you say, that foreigners are not feeling comfortable with dollar assets. Fine.

But I just . . . Given how strong US stocks are, is it a lot of talk from the money managers? Oh, we’re not gonna buy US stuff any more. Like, do they even have a button in their office that buys anything else? Do you know what I mean? Like, these people are so habituated to being overweight the US and buying American fixed-income and equity assets. I’m just slightly sceptical that while they might tell someone who asks them in a survey, how do you feel about America, they might say, I feel bad. But I wonder if they’ve really changed the composition of their portfolios.

Katie Martin
No word of a lie here. I get emails from people saying, please tell Rob Armstrong that he needs to understand that us foreigners, we are not mucking around. (Robert laughs) We really are going to pivot away from US assets. And the sooner Rob and the rest of the US can get this idea through their head, the happier we’ll all be.

Robert Armstrong
Yeah, but the S&P 500 says, buzz off, foreigners, with your strange languages and your nice clothes. You know, we’re doing fine without you, pal. Now look. And Treasury yields, look, the 30-year Treasury is not looking great. The yields are high, the prices are falling. But God knows America can live with a 4.5 per cent 10-year Treasury yield. If it’s 5.5 per cent, it’s a bit, we’re gonna get the flop sweats.

Katie Martin
What? (Laughter)

Robert Armstrong
You know, I just think if, like, you know, the yields get much higher than right now, it becomes really burdensome for the United States to support its debt, and it starts to really dominate . . . the interest payments start to dominate the budget.

Katie Martin
Sure. But I think we can at least agree that we’re getting some really mixed messages from markets here, right?

Robert Armstrong
Correct.

Katie Martin
Stocks doing pretty well. Not as well as the rest of the world, but doing pretty well.

Robert Armstrong
And it’s mostly those Big Tech stocks.

Katie Martin
Yeah. The government bond market is saying, ooh, we’ve got the heebie-jeebies about fiscal deficits and about institutions and all of that stuff in the States. You’ve got the dollar falling, which says the same sort of thing. So . . . Which is why and which is wrong.

Robert Armstrong
Yes. I would just soften . . . Wait, wait, I’m interrupting again. I’m not gonna play this podcast for my wife because she’s gonna see me doing this. (Katie laughs) But I will interrupt again to say the bond market is not freaking out that bad. It’s a little jumpy at the long end, but it just ain’t that bad. The vigilantes are visible, the bond vigilantes are visible on the horizon, but they are not coming, storming over the horizon to ravage . . . 

Katie Martin
They’re not having a full-on tantrum just yet.

Robert Armstrong
No, not yet.

Katie Martin
So does that mean you’re all in? My thought here is that stocks are on thin ice and that you need more good news, which is not currently kind of coming through to really sustain this going further. Do you think the worst has passed and the only way is up?

Robert Armstrong
I wouldn’t go that far. I mean, as I’ve said on the show before, stocks are expensive. The economy, while it’s pretty good, the trend is sort of flattish. Earnings are quite good, but I’m not sure how much better they can get. So I’m not, like, roaring into equities here.

I’m just saying there is this collection of orange flags. I’m just saying that the flags aren’t red. So I’m not running and I have a lot of friends who are like, I’m selling all my stocks and just waiting this stuff out. I’m not that person. I have plenty of cash in my portfolio for the reasons you’ve described so well, Debbie, but I still own a lot of equities too. That’s not investing advice. That’s just what one no-longer-famous schmuck is doing with his own money.

Katie Martin
Listeners, Mr Taco has spoken. (Robert laughs) Orange flags on the horizon. Make of that what you will.

Robert Armstrong
What you will.

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Katie Martin
You can ponder that in the short break before we come back 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 or short a thing we hate. Rob, what you got?

Robert Armstrong
I have a pair trade for you, Katie.

Katie Martin
Another one. Beautiful scene.

Robert Armstrong
OK, so I am going to go long Blackstone and short KKR and Apollo.

Katie Martin
Oooh.

Robert Armstrong
It’s great rivals in the private equity wars. There’s an outstanding piece in the Financial Times today by my excellent colleague, Antoine Gara, basically making the point that Blackstone’s business model is very different from the one that KKR and Apollo are going towards, where Blackstone is just a fee model — it like, takes your money and manages it for a fee, it doesn’t play with its own money — whereas Apollo and KKR have decided we’re gonna, like, own insurance companies and other businesses that have their own capital and generate their own capital, and we’re going to invest that money.

And I think Blackstone, for this cycle, it might be on the right side of that bet. I just feel like the lower-risk, lower-capital business fits the times a little better. This is not investing advice for the extremely rich men who own Blackstone, KKR and Apollo.

Katie Martin
Yeah. I just like the idea of all these, like, extremely rich masters of the universe arguing with each other and just, like, bathing in money.

Robert Armstrong
(Laughter) Money fight!

Katie Martin
That reminds me, I am gonna be long of a story that was in the FT last week about how Nigeria is cracking down on like, money showers. So apparently at weddings and big celebrations, you literally just, like, throw huge wadges of notes of money at people and this has been described, I think it was like an insult to the currency and shouldn’t be allowed. And I think . . . I just love that whole thing.

Robert Armstrong
I think that’s the opposite — glorifies the currency, right?

Katie Martin
So you get, like, really low-denomination naira notes and just, like, hurl them at people.

Robert Armstrong
Make it rain, baby.

Katie Martin
Yeah.

Robert Armstrong
I love it.

Katie Martin
I really wanna go to a Nigerian wedding now.

Robert Armstrong
Yeah, seriously, I’m ready. I’m getting a huge wad of naira and I’m gonna party. (Laughter)

Katie Martin
(Laughter) Yes, with your newfound fame, which is quickly, let’s just remember . . . 

Robert Armstrong
Dissipating.

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Katie Martin
Wearing off. OK. That is enough for us for today. Listeners, we will be back in your ears on Thursday, so listen up then. And in the meantime, remember, don’t be a Debbie Downer.

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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