Transcript: Two stock markets, two takes

This is an audio transcript of the Unhedged podcast episode: ‘Two stock markets, two takes’

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Ethan Wu
The S&P 500 just hit an all-time high while the UK’s main stock index, the FTSE 100, named after the Financial Times, most certainly did not. Today on the show, two markets, two takes. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I’m reporter Ethan Wu here in the New York studio, joined from London by “I’m not gonna quite call you UK advocate” Katie Martin.

Katie Martin
Hey, how are you doing, Ethan?

Ethan Wu
Hey. I’m good, I’m good. I’m representing the US on the show and you are representing the UK side.

Katie Martin
As always. You’ve got like, the whole, like, bandanna with a flag on it and everything.

Ethan Wu
Well, Katie, it’s totally unmissable that the S&P 500, after what feels like years of nonstop bad news, has crawled, kicking and screaming to an all-time high. And so we thought we’d talk about that on the show. But we wanted to, because we spent most of the last show talking about US stocks. We also wanted to put up a foil, the curious case of the FTSE, which we’ll get to in a minute. But let’s start with US stocks, Katie. It felt like this was the least jubilant all-time high that I’ve ever witnessed, but maybe I haven’t witnessed it all.

Katie Martin
Yeah. Normally when, you know, the S&P 500, like the big stocks index that everybody knows and loves, when that thing hits a record high, it’s like, woohoo, get out the bunting, you know, slap on the kind of baseball caps and all the rest of it. And this time everyone’s like, meh, yeah, OK. It’s kind of limped over the line. So the index had a good run on Friday that took it to an all-time high at like 4,800 and a bit. It’s up sort of 1.7 per cent so far this year. And, yeah, where’s the joy? Where’s the glee? Where are the parties in the streets?

Ethan Wu
And I think one of the reasons for the lack of jubilance has been the Mag Seven. They were the ones kind of dragging the index over the threshold to an all-time high. You weren’t seeing this kind of broad-based excitement about US stocks in general.

And you know, it gets to, as we talked about many times, the big valuation gap between where the Magnificent Seven are, the very top of the market is quite expensive, and where the kind of the meaty middle of the market is, which is average to maybe a tiny bit expensive, but not really that expensive.

And you know, when you don’t have this kind of broad-based rally in equities, it gives people nerves, which is a weird thing again, to talk about when you’re at an all-time high. But that’s sort of how it feels like to me, right? It’s that people want to celebrate, but also they don’t. And so you end up with this sort of ambivalence.

Katie Martin
Yeah. So the equal-weighted S&P 500. So rather than having an index that is weighted according to the market capitalisation of the things inside it, which when it comes to the Mag Seven Big Tech tech stocks, they absolutely dominate this thing. If you just give each company in the S&P 500 an equal slice, then that thing, that index is down actually about 1 per cent so far this year. So like, meh, what in fact you’ve got is like Meta, Microsoft, Nvidia really doing the hard work so far this year. Amazon’s doing OK among the other sort of Mag Seven stocks. Google’s doing quite nicely. Apple has picked up. Tesla is a whole other story. And I suspect we’re gonna be talking about this in a separate podcast sometime soon, because they’ve got results out later this week, I believe. But there’s just like three stocks that kind of matter at the moment. And that doesn’t feel very satisfying now.

You know, if you take the seven, you know, yeah, we talk a lot about Mag Seven and we talk a lot about how top-heavy the market is. But sometimes when you see little kind of stats around this, it’s just mind-blowing. So if you put together the Magnificent Seven stocks, those ones I just named, and squish them together, that’s as much as the entire market capitalisation of the stock market in Canada, the UK and Japan put together. But this is bonkers! This, you know, this isn’t right, but it’s not gonna stop. So look, we need to just kind of psychologically get over it and start thinking, yes, this is stupid, but stupid things last for a really long time, so let’s just roll with it.

Ethan Wu
Well, it’s not just investors, Katie, that have been curious about the Big Tech stocks. It’s also regulators in the US and in the EU. Antitrust scrutiny has been a big story around the big technology companies for several years running. And it’s something we don’t talk about as much on the show. But, you know, this is two markets, two takes we promised listeners to take. I wanna make the case that antitrust scrutiny, which is a big topic among investors that focus on these stocks, is actually probably a smaller problem than it may appear. And we just had an interview . . . 

Katie Martin
Is not why they haven’t done anything yet? Well, I have to say they haven’t done anything. But, you know, where is this sort of big moment of drama where they say, right, Google, you must split into a thousand little Googles?

Ethan Wu
Well, supposedly it’s 2024, so the reporting suggests. But you know, you’re right, Katie. It’s been this drumbeat in the background for these tech companies, right? Like the Department of Justice in the US, the European Commission, a whole bunch of state regulators all looking into these tech stocks, bringing lawsuits. There’s almost too many to keep track of. And, you know, we talked last week on the Unhedged newsletter to the scholar of antitrust law. His name is Herbert Hovenkamp. His take was that the merits of a lot of these cases, with a couple of exceptions, are relatively weak. And, you know, he talked about, you know, the case against Amazon has the problem that Amazon is big and dominant. And everyone knows Amazon. And they have a finger in every pot. But in any individual market, they tend to be on the weaker side. It’s not, you know, dominating the tyre market or the, you know, the spoons market. And according to the professor, that’s kind of the relevant unit of analysis when it comes to antitrust.

Katie Martin
What, spoons?

Ethan Wu
Yeah, there’s no spoon monopoly. Now, interestingly, one case that he did think had some merit is the Facebook divestiture case where the FTC in the US is trying to get Facebook to spin off WhatsApp and Instagram, which there’s some history that Facebook acquired Instagram to buy out a competitor. That could really change the economics of Facebook as a business.

Katie Martin
So is your hunch that this is the year that the regulators bite, or based on your chat with this expert, you feel like, nah, this is just gonna keep simmering?

Ethan Wu
I think what I’d say is 2024 is probably the year that some of these long-pending antitrust cases start to hit, but that the actual impact to investors probably will be on the smaller side. And this is a view shared not just by the antitrust professor, but also by investors in these companies that I’ve spoken with, that the ultimate impact should be small, because a lot of these cases are, you know, sort of legally dubious. And the ones that are stronger, like the case against Meta calling for a break-up ultimately doesn’t implicate investors as much because, you know, investors would get the shares of the spun-off Instagram and WhatsApp and so forth. So if I had to sum up, I’d say antitrust in 2024: it’s gonna hit, but it won’t bite.

Katie Martin
Ah, I see what you did there. Nice. Nice.

Ethan Wu
There you go. There you go. Well, Katie, that brings us to our second market of interest today: the UK’s FTSE 100, which, you know, gets a little bit less attention than the S&P 500, to put it lightly. But why are we interested in the FTSE?

Katie Martin
Of course, we’re interested in the FTSE. This is like the cornerstone of the City, of the UK financial services industry, which is one of the most important industries in the entire country. So it’s really crucial to the health of the City, to the health of the UK economy that we have a kind of well-functioning ecosystem, of which the equities market is a really big part.

And poor old UK equities market is not very well at the moment. So while you’ve got the S&P doing its thing — woohoo, Mag Seven, excitement, record highs — the FTSE 100, the kind of main UK stock index is down 3 per cent so far this year. So it’s kind of difficult for us to kind of gather lots of attention from global investors. But there’s always some brave soul out there saying everyone hates UK stocks and that’s the reason to buy it.

And there are some really kind of, you know, big important global companies out there. You think of AstraZeneca, you think of Shell, you think of Unilever. You know, we cover a lot of ground here. We have some great companies. And there are certainly fund managers out there who think that, you know, these things are just going for a song. They are just too cheap and it can’t stay like this forever. And at some point, other markets around the world will catch up with US stocks or at least make up some of the gap.

And UK companies, as a rule, pay out these mysterious things that US investors are not terribly familiar with called dividends.

Ethan Wu
Oh, what’s that?

Katie Martin
I know, I know, give money to shareholders. It’s like magic money from the sky.

Ethan Wu
Very old-fashioned.

Katie Martin
But, you know, very unfamiliar territory for US stock markets. But, you know, you get a kind of yield out of these things. So, you know, there are certainly investors who think this thing is too beaten up or it’s too overlooked and it’s just too widely ignored and it’s time to get in. The cautionary note is that people keep trying this over and over again and it keeps not working. But, you know, maybe this time is different.

Ethan Wu
Eventually, UK stocks will indeed be a bargain. And I mean, if you just look at the headline valuation multiples, the UK is marketwide 11 times next 12 months earnings versus 20 times for the US. That’s a pretty sizeable gap which, you know, kind of it raises the question, Katie. Let’s put our money where our mouths are. If you were to pick — overvalued Mag Seven-dominated premium valuation US stocks or beat-up, bargain-bin, low-multiple, unloved UK stocks — what’s the prudent buy, Katie?

Katie Martin
I’m gonna buy the shiny things. I’m gonna say US. But you have to promise not to tell Rob Armstrong. Otherwise he’ll never let it lie.

Ethan Wu
You should count your lucky stars that Armstrong is on vacation this week, because he would be pulling out his America bugle and trumpeting it at maximum volume, setting off fireworks in the New York studio. I think for me, Katie, I made this point on the last show with Rob. The rest of the world, you know, I just think given where valuations are, it’s such a high bar for the US to outperform. On the other hand, it’s such a low bar for the UK and a lot of other, I won’t call them emerging markets, but . . . 

Katie Martin
Oh, brutal!

Ethan Wu
Alternative markets that, you know, I think now might be the time to rotate a little bit, at least on the margin. You want a lot of US stocks, for sure. I mean, the track record is so good in the long term. But you know, just given where valuations are, not a bad place to rebalance, I think. That’s my two cents.

Katie Martin
OK. Be a hero, Ethan.

Ethan Wu
The hero the UK deserves.

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All right, Katie, we’ll be back in a moment with Long/Short.

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Welcome back. This is Long/Short, that part of the show where we go long a thing we love, short a thing we hate. Except in this edition of Long/Short, we’ve only got one thing to talk about. And that’s the original long/short: the mullet. I’d like to read, dear listeners, from Katie Martin’s recent column in the Financial Times. She’s talking about the 60/40 portfolio, which is where you put 60 per cent of your portfolio in stocks, 40 per cent in bonds. Here it goes: “Logically enough, the time-honoured tradition of layering boring old bonds on top of a portfolio of stocks also felt the heat last year. This classic 60/40 portfolio, a mainstay of conservative asset management, is the mullet hairstyle of the investment world. The 40 per cent is the short, sensible business in the front in the form of a conservative, even dull, layer of bonds with a near-zero chance of default. The party at the back is the rock ’n’ roll 60 per cent slice in equities that portfolio managers hope will dazzle the crowd.” Katie, I was dazzled by this passage.

Katie Martin
I feel very weird about having my words read back to me like I’ve been caught. I can only apologise to the judge and everyone else affected by my rubbish joke. I think it still stands though. But kind of what was fun about 60/40 last year is that it was looking totally disastrous right up until this sort of turnaround in the bond market. So it’s supposed to be this nice, boring, safe way of, you know, balancing out a portfolio. But, turns out everything is bonds. So it’s the only thing that matters. So if they take a bath, then your mullet hairstyle also gets washed. Something like that?

Ethan Wu
That’s good, that’s good. Katie, I have to ask you about your tradecraft. Do you just sit around thinking about analogies for the 60/40 portfolio and you’re like, oh, I got it! Mullet — that’s it. That’s the one. Or did you get this from somebody?

Katie Martin
These extremely poor-quality jokes just come to me in a flash of inspiration. I gather, because you emailed me the other day saying that you’d had an email from a listener saying that they loved the rubbish jokes on our podcast and I thought, what rubbish jokes? They’re all very high-quality.

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Ethan Wu
Listeners, if you have any more criticism, feedback, love, bad jokes of your own, let me know. ethan.wu@ft.com. All right, Katie, thanks for being here. We’ll have you back very soon. And listeners, we’re back in your feed on Thursday with another episode of Unhedged. Catch you then.

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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 Ethan Wu. Thanks for listening.

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