This is an audio transcript of the Unhedged podcast episode: ‘Vibrational movements in the market’
Robert Armstrong
Something has changed. The air feels different. The barometer is dropping. It feels like the stars are realigning. The winds are shifting.
Aiden Reiter
Were you about to sing the Wicked intro? (Singing) Something has changed within me.
Robert Armstrong
(Laughter) As it happens, I was about to burst into song but you ruined it.
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This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, chairman of the board and acting CEO of Unhedged, Inc.
Aiden Reiter
Only acting?
Robert Armstrong
(Laughter) Joined by my obstreperous chief financial officer, Aiden Reiter.
Aiden Reiter
So it sounds like what you were talking about before, Rob, was the market’s vibe shift.
Robert Armstrong
Yeah. We have had a vibe shift. Let’s talk about that for a second. What have we been seeing? What are the actual data that constitute what we’re calling a vibe shift here?
Aiden Reiter
So maybe the best indicator is we had a market drop last Friday. It was about 1.7 per cent. Nothing crazy.
Robert Armstrong
Not the end of the world.
Aiden Reiter
Not the end of the world.
Robert Armstrong
The biggest in a while.
Aiden Reiter
Biggest of all, bigger even than when we had DeepSeek. And what seems to have been the cause was a build-up of bad economic data, specifically a consumer sentiment survey that came out on Friday. It showed that, you know, the housing market is not doing great, showed that consumers are feeling really, really bad about the economy.
Robert Armstrong
Yeah. Or worse.
Aiden Reiter
Worse. Yeah. Worse than they had for a while. And that somewhat pushes against the narrative that we had of early Trump days. A lot of the 2025 outlook said this is gonna be great for growth. He’s gonna boost domestic spending.
Robert Armstrong
I would even say, you know, we had a certain amount of that in the newsletter and on the podcast. I mean, there was good reason to expect growth under Trump — deregulation, tax cuts, maybe some other stimulative fiscal activity, things of this nature.
Aiden Reiter
Yeah. But those things have not happened whatsoever. Instead, we’ve just had . . .
Robert Armstrong
We haven’t seen them yet. Yeah.
Aiden Reiter
. . . A lot of threats about tariffs that have not really come to pass. Again, tariffs could be good for growth. They also could be bad for growth. You know, jury’s a little out. It’s definitely good for domestic stocks and domestic-focused companies like small-caps, but they haven’t seen that bump.
Robert Armstrong
I’m glad you mentioned small-caps because that has been a big part of the vibe shift. Small-caps, which were briefly the darlings of the Trump trade, have been acting like doo-doo.
Aiden Reiter
Yeah. Mid-caps and small-caps have just been, like, sliding down while the broader market is just flat.
Robert Armstrong
So the idea is, you know, big-caps, 40 per cent of their revenue canonically comes from abroad. Small-cap and mid-cap US stocks are very domestically focused. If you thought America was gonna get tired of winning, you’d expect the small- and mid-caps to outperform the big-caps. But we have seen the opposite.
Aiden Reiter
And they’re also theoretically more sensitive to economic growth within the United States for that reason. So if you have boosted growth, higher tariff walls, small and mid should do better. That hasn’t happened. The market is not saying that these things will not happen. But none of these things have happened yet.
Robert Armstrong
It’s just repricing them a little bit.
Aiden Reiter
Yeah. We haven’t seen any of these policies yet. Instead, we’ve just gotten threats of tariffs. We’ve gotten some very quixotic and interesting things about the Ukraine war, which markets care about, but maybe not so much. And we haven’t really gotten anything that would make investors believe that Trump is focusing on tax cuts and focusing on deregulation. It hasn’t been the day one agenda.
Instead, on balance, we’ve only gotten things that are theoretically bad for economic growth: immigration enforcement — we’ve gotten a lot more statements on that. We’ve seen at the same time some bad economic indicators, as I said.
Robert Armstrong
Yeah. We didn’t mention another. We talked about the consumer surveys, which have been poor, but we also got ISM Services. Of course, regular listeners to the show will remember that it is the services end of the US economy that’s really been holding things up. And the ISM survey of businesses had a nasty slowdown in its last reading. We’re close to 50, meaning no longer an expansion.
Aiden Reiter
Yeah, it dipped into contraction, and it’s the first time it’s contracted in I believe four years.
Robert Armstrong
Yeah. So that was bad vibes too.
Aiden Reiter
Yeah. So services, which carried up the economy, are now falling. Manufacturing went up a little bit. But if you look into what the manufacturers said, it was because of a juice-up in orders ahead of tariffs. So manufacturing is doing well. But that is not going to be long-lasting. So the economy, it looks like it’s gonna slow down. And then on top of that, if you look in the consumer sentiment survey and in the ISM, households and manufacturers and services people said they’re really concerned about what tariffs are going to do to their prices.
Robert Armstrong
Yeah. The uncertainty of it is wearing on people.
Aiden Reiter
Uncertainty. And even the manufacturers said they actually saw some supply chain price increases, especially from abroad.
Robert Armstrong
Which makes sense if you think that suppliers might be getting ready to pass price-through as tariffs bite into their margins.
Aiden Reiter
Yeah. And aluminium people might already be doing so because we actually already have tariffs on aluminium now.
Robert Armstrong
One specific piece of company news that we got that I think added to this unsettled feeling is Walmart, biggest employer in the country, I think still, and certainly the most important retailer, gave guidance for 2025, which was a little bit soft. A little bit softer than the growth they were looking.
Aiden Reiter
Yeah. Consumers are gonna be stepping back, by their estimation.
Robert Armstrong
Yeah. So that’s not good.
Aiden Reiter
And as a result, other retail stocks also fell.
Robert Armstrong
So let’s talk about the market reaction and the place to start, although it’s never the place to finish, is the Fed. So just a few weeks ago, people were expecting two rate cuts by December of this year, by the end of the year. The policy rate is at 4.5 per cent. A few weeks ago, the futures market was looking for about a 4 per cent rate by the end of the year. Now we’re down to a little under 3.8. So basically another cut has come into the picture. And so this is suggestive of the market saying there is gonna be a little bit less growth than we thought or that’s how it looks as of now. We don’t like the recent data package. So we’re putting another rate cut into the outlook because the Fed is gonna see growth slowing and is gonna wanna juice the economy a little bit.
Aiden Reiter
Yeah. And the Fed also might see some employment pressure, right? So the Fed’s dual mandate, right — rates and employment.
Robert Armstrong
Yeah. What is the employment picture?
Aiden Reiter
So we got unemployment claims data last week. Yes. It showed that people filing for unemployment ticked slightly up — not overly concerning. But that’s before we’ve seen the Doge impact play out in the labour market.
Robert Armstrong
Yeah, people . . . I’ve seen a couple of pieces about this, that people are starting to worry that enough federal workers are being fired or laid off, furloughed, etc, that this might actually start showing up in the employment numbers.
Aiden Reiter
Yeah. So it’s not only the actual employees, federal employees who might be cut from this. It’s the many, many contractors the United States government hires. I saw some estimates that could be as many as 1mn workers laid off, furloughed in the next couple of months. That is about 15 per cent increase to unemployment in the United States if all those people immediately enter into the job market trying to find a job and aren’t immediately absorbed by the private sector.
Robert Armstrong
Absorbed by the private sector, yeah. And of course, there’s always a transition period when people shift sectors like that. I mean, I guess the picture up until recent weeks had been this: unemployment steady at kind of 4+ per cent, but little worries around the periphery. Not as much hiring as you’d like to see. Not firing either.
Aiden Reiter
And not quits.
Robert Armstrong
And like a very small number of quits. So what we’ve had up until now is a kind of stable but not very vibrant job market. Again, on the margin there, there is a little bit of worry. So other market responses: in January, early January, the 10-year Treasury yield, the most important price in the world, was 4.8 per cent. By fits and starts, it’s come down and it’s come down quite quickly. Lately, we’re now sitting at 4.3. What is that telling us I guess is the question. It’s consistent with lower growth.
Aiden Reiter
Lower growth and more Fed cuts as a result.
Robert Armstrong
Yes. So rates are coming in. And of course the dollar is starting to soften a little bit to as it naturally would as US rates fall relative to the rest of the world. Mathematically, that implies the dollar has to be weaker. And again, I think we should emphasise how surprising this is. The strong dollar was like one of the core expectations for the Trump economy. And that is changing now.
Aiden Reiter
Yeah. I mean it’s still strong, right? It’s still up as opposed to where it was before. And interestingly, you know, a weaker dollar might help revive the growth narrative, right? Makes US exports more attractive, but it also could depress US consumption just a little. So it sort of could help solve some of this. But at the same time it’s not what the market expected.
Robert Armstrong
Yes. Another surprise. Now let me add another surprise to the list — US risk assets not responding to a slowdown in growth quite the way I would have thought. Yes, US big-cap stocks have been going sideways for a while, small-caps have been falling a bit, but valuation multiples are still very high on stocks. And more striking still, the spreads over Treasuries of corporate bond yields have not budged a bit. So if you thought growth was really coming in, you’d start worrying about credit quality a little bit. Not happening. So it seems like we’ve talked about the kind of rates and currencies markets. There’s a very clear response — Fed expectations, bond yields, the dollar. But for me, risk assets corporate bonds and stocks are kind of eerily quiet. You might have a different read on it than I do.
Aiden Reiter
No, I think that’s right. We’ve seen equities sort of be flat. But there has been a change within that, which you wrote about yesterday. While the S&P 500 is somewhat flat and kind of riding along, there’s been a shift in what is working well and what is not working well. Defensives are up.
Robert Armstrong
Yeah. It’s true. I was seeing this morning that Campbell Soup is on a little bit of a run. And if tomato soup is doing well, I think that has to be a spooky indicator.
Aiden Reiter
Yeah, that can’t be a good sign.
Robert Armstrong
That’s comfort food, right?
Aiden Reiter
(Laughter) I feel like that’s like, raw sustenance. Like, we need to get through this winter.
Robert Armstrong
(Laughter) And here is perhaps the biggest trend in risk assets, which is the Magnificent Seven are not very magnificent. They are not riding into town to drive the bandits off and save the peasants. Basically, all of them except Meta have been behaving poorly this year. Nvidia, Microsoft, Google, Apple — so-so, but not great. And even Meta has been falling in the last week or two. So the great big-cap tech stock that was the engine of markets for years is flat to down now.
Aiden Reiter
I spoke with someone who said that well, if you look at the equal weight, right, if you don’t have this giant market cap of the Big Tech pulling everyone else down, other stocks are actually doing decently well, right? Defensives, non-Big Tech value stocks are actually doing all right. But again, that is showing the market is getting into a bit of defensive crouch.
Robert Armstrong
Yeah. It really is amazing. It’s the opposite of the market we had for the last few years where the market was weak and the Magnificent Seven carried it. Now the market is OK except for the Magnificent Seven, which is really dragging it down.
Now we come to the spookiest possibility of all. We just spoke about how yields on Treasuries are coming down. And in an environment where growth is falling, this is the most natural thing in the world. Weaker growth, investors seek safety a little bit more. They put more money in Treasuries. Bond prices go up. Yields fall. That’s all very normal. But what isn’t happening right now, which is very important, is that inflation expectations are not driving that. So the good side of slower growth in a situation like the one we’re in today where inflation is a little hotter than we would like is that a little lower growth, all else equal, should bring inflation down.
Aiden Reiter
Which is sort of the Fed’s goal of keeping rates higher for longer.
Robert Armstrong
But the 10-year break-even inflation rate is at 2.4 per cent, right at its highs where it’s been. And if you look at other cuts on the inflation expectations data, there’s mild declines, but not much.
Aiden Reiter
Yeah, they came off just a little bit on Friday, when the rest of the market seemed to absorb the slow growth narrative, but not nearly as much as some of the other changes thus far.
Robert Armstrong
Like, real yields went down. That is yields adjusted for inflation. What you’d like to see in a situation like this is nominal yields come down because inflation expectations are coming down. So again, there’s two components of the Treasury yield. There’s expected inflation and then there’s the real rate of interest. And we’ve seen the real rate of interest come down but not expected inflation, which is what we want to see fall. So that is spooky because it raises one of the scariest words in economics. What is that word, Aiden?
Aiden Reiter
Stagflation.
Robert Armstrong
So the idea, the horrible idea that starts to gnaw on the mind at moments like this is that inflation could stay high and growth could fall.
Aiden Reiter
Yeah. And that puts the Fed right between the two sides of its mandate. If they have to cut in order to save the economy or save the labour market. And again, as we said before, slower growth. We’re gonna have some labour market changes in the next two months probably. Then that would cause inflation to tick up again. Or they could, you know, keep rates where they are and watch the economy crumble while inflation only comes down a bit.
So they’re always caught between the two mandates that they have. And as we said before, there is reason to believe that inflation might go up even without higher growth, right? So in the manufacturers’ surveys, in the consumer sentiment surveys, everybody seems to be very concerned or at least is starting to see the impacts of tariffs on price. And, you know, there’s some people who’ll say that’s not inflation. That’s price change, step change, yada yada. At the end of the day, the Fed is looking at the basket of goods. If the price on the basket of goods goes up, to them that’s inflation.
Robert Armstrong
Yeah. They cannot cut if inflation is where it is today. I just don’t think they can do it.
Aiden Reiter
Yeah. I mean, the last inflation print we got was much hotter than people expected. It was at 3, right, ticking back up again. So again, they don’t have a room to cut. But if the economy crumbles, that’s stagflation.
Robert Armstrong
I mean, we should note here that this is one batch of data. You know, we’ve had a bunch of survey information, company reports that all sort of point in the slower growth direction. We had a bad inflation print. We see inflation expectation measures not moving down as we’d like to see. But this could be a blip. These market narratives come and go. All we can say for sure is that the last couple of weeks has had a stagflationary flavour to it, and that’s just not what you wanna see.
Aiden Reiter
No, I am too young to remember the last stagflationary event. Could you tell us, regale listeners with your experience?
Robert Armstrong
Well, I was talking with our editor Bryant about the terrible increase in the prices of comic books in the late 1970s, at the same time as allowances did not rise. Anyway, we were squeezed between buying the latest Uncanny X-Men or Daredevil.
Aiden Reiter
How could you ever choose?
Robert Armstrong
And weekly handout. It was very difficult. But again, for me, the thing that still strikes me is that we have seen poor growth data recently. Some suggestion that the poor growth might not be accompanied by lower inflation. This is all pretty bad news. Risk assets really not responding. As far as I’m concerned, there has been ups and downs, puts and takes, but credit spreads on corporate bonds and stock valuations still remain incredibly high.
And at least coming into this — and we wrote about this a little bit very recently — surveys of investor expectations, in particular institutional investors, are still very bullish. The Bank of America survey of asset managers is one of the most famous surveys. Cash levels in institutional investor portfolios near very long-term lows. Bullishness about equities extremely high. So it’s like we’ve got this situation — bad economic data, worries about inflation tied to high valuations and high investor bullishness. It doesn’t feel like a great set-up to me.
Aiden Reiter
Yeah. We should note that according to those investor surveys, bullishness did come up just a little bit around the same time, right? So investors might be starting to be hip to that even though they’re still in firmly bullish territory. And it’s also worth bearing in mind that those surveys are kind of backwards-looking, right? They only really react when investors do something about it. And they haven’t sold off just yet.
Robert Armstrong
Yeah. Investors are hanging on.
Aiden Reiter
Hanging on. And they’re hanging on for a couple arguably good reasons, right? They still might get some of the things they’re expecting from the Trump administration — deregulation, tax cuts. And also, as we said, this might be a blip in the data. We don’t know completely for sure. But we really need to wait for is the next inflation readouts that we get and the next surveys. Again, this was a flash PMI, right? The ISM survey was the preliminary. Once we get the final and once we get the next inflation print, we’ll have a better picture if stagflation is truly in the air.
Robert Armstrong
But investors are still holding out hope for now. And who are we to doubt the collective wisdom of the market?
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Listeners, we will be right back with Long and Short.
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Welcome back. This is Long and Short. That’s the portion of the show where we go long things we like and short things we don’t like. Aiden, do you have a long or a short for us?
Aiden Reiter
I do. I am short US defence stocks. So Trump has kind of spooked all of Europe and encouraged them to invest in their own defence. Theoretically, that might be good for US defence stocks that would then sell their goods to Europe. But nobody wants to buy US right now, especially these countries that have just been scorned by the Trump administration. So for that reason, you know, there’s been a big rally on European defence stocks and US defence stocks haven’t experienced the same jump. So for that reason, I actually think they’re gonna have more headwinds going forward, especially if the rest of the world starts arming up and they don’t want anything the US is selling.
Robert Armstrong
Man, that is a bleak outlook for Lockheed and all the rest.
Aiden Reiter
They’ll be OK.
Robert Armstrong
I am gonna be short my 53-year-old knees. I just came back from a skiing trip. I feel like the Tin Man. So I guess I’m long knee replacement.
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Aiden Reiter
A lot of Wizard of Oz references today.
Robert Armstrong
Yeah, it’s true. So listeners, skip down the Yellow Brick Road for another few days. We’ll be back in your feeds on Thursday.
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 Rob Armstrong. Thanks for listening.
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