Cool markets, hot takes

SPEAKER_1 (0:00)

We recognize that there's real risk to recession in the coming year. If you looked at the CBO baseline, deficits as a percent of GDP get to about 8%, which is a deterioration from where we are now. Today, we're around 5, 6%. But the CBO doesn't have a recession built into that forecast. Think about what has happened over sort of the last few recessions. The fiscal authorities always step in.

SPEAKER_2 (0:20)

To hear more about potential impacts of our increasing federal debt level, subscribe to PGEM's The Outthinking Investor in your favorite podcast app.

Ethan Wu (0:36)

Pushkin.

US markets finished December with a bang and are starting January with a whimper. Stocks are down just about 1% in the few trading days we've had so far in 2024, with big tech leading the way down. Apple, for one, is down 5% after getting downgraded by some analysts. And the bond market is falling too. Yields have risen 12 basis points on the long end so far. To the end of the show, we've got thoughts.

This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu, here in my mother's closet in Sacramento, California. And on the other end of the line, all the way from New York, which I miss dearly, one financial commentator, Robert Armstrong.

Robert Armstrong (1:23)

What are you looking at right now? What's she got in the closet, Ethan?

Is it like linen? Is it like sheets? Or is it women's clothing? Or what are you looking at?

Ethan Wu (1:31)

It's mostly women's clothing. My mom likes reds and blacks, I think, just judging by the color spectrum in the closet.

Robert Armstrong (1:38)

Right on. I'm sure she's a woman of immaculate taste.

Ethan Wu (1:41)

Absolutely, absolutely. I am, I think, contractually and cosmically obligated to agree with that.

How was your New Year's?

Robert Armstrong (1:49)

I had the most New York possible New Year's Day.

Ethan Wu (1:52)

Is that right?

Robert Armstrong (1:53)

Yeah, I went to Coney Island. I did the Polar Plunge with my kids.

And then I went to Nathan's Hot Dogs and consumed a chili cheese dog, and then I rode the Cyclone roller coaster. Then you get your official I Am A New Yorker card after you do that trifecta.

Ethan Wu (2:11)

Wow, did you have any moments where you felt like you were gonna throw up on the roller coaster?

Robert Armstrong (2:16)

Almost the entire time in all three steps, but that's irrelevant. It was a good kind of nausea.

Ethan Wu (2:23)

Speaking of things that are plunging and or puking, stocks, Rob, it's been just over two trading days here in the US and stocks are down. Yesterday, it looked like they were going to be down about 2%. Today, they've gone up a bit more like 1%. But I think any way you cut it, it's been a bit of a damp squib so far this year, led especially by some of the big tech stocks. Apple, so far this year, down more than 5%. Not a great showing for Apple and for big tech. At the same time, bond yields nudging up a bit.

We closed out 2023 with the 10-year yield falling.

Now we're closer to 4% up about 12 bips so far this year. I don't think it's quite the start that market participants were expecting. And it's got us thinking about, what should we be looking for in these markets to try to answer some of the questions we were left with in 2023?

Robert Armstrong (3:14)

Okay, so a little tightening in the cost of long-term money. And I think that's gonna be a huge theme for the year. Obviously, it's come down from its kind of near 5% highs.

And while much of our attention and the attention of the market has been on the short end of the curve on what the Fed is going to do with its official policy rate, I think a lot of what happens in weeks to come and indeed for the rest of 2024 is gonna revolve around what we see at the long end, at 10 years and longer.

Ethan Wu (3:49)

Yeah, I mean, there was a period last year where I felt like most market participants had like a coordinated long-term yields freak out, where everyone was talking about, look at the deficit, look how huge it is, inflation, it's not coming down easily. And then we crossed 5% one day on the 10 year yield, which was like a holy shit moment, right?

And we've retraced more than a full percentage point from that point crossing 5%.

Robert Armstrong (4:13)