Learning to love the boom

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 PGEMS, the out-thinking investor, in your favorite podcast app. US stocks are absolutely rollicking.

Ethan Wu (1:00)

And like any other point where stocks are doing well, it's gonna invite some doubters, some bearers, some complainers. There's even been talk about US stocks being in a bubble on the front page of the Wall Street Journal. Here in the Unhedged podcast, we're not quite in the bubble camp just yet. In fact, we think there are five reasons that US stocks actually have a decent amount going for them.

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 back from my week away from the show. Joined from London by Markets columnist Katie Martin.

Katie, I appreciated you stepping in while I was gone, but I have to lodge a complaint. And actually, it's not my complaint. A listener filed a formal complaint about your shows, Katie, and this is from Antonio. It goes as follows.

Since the podcast aired, two things happened. I started getting targeted adverts of vests slash gilets on my social media and the EBITDA cashmere vest you mentioned by Kivor is now sold out. How can I now pretend to be successful without my sample of the vest to parade in central London? Please advise, Katie.

Katie Martin (1:49)

Well, first of all, I told Antonio, I actually saved him like a thousand pounds there for buying one of these vests slash gilets.

And also, it's Alphaville's fault. If in doubt, blame Alphaville. It was their idea to stop banging on about gilets.

Ethan Wu (2:07)

Blaming Alphaville is definitely something we can both agree on. But something that people in the stock market cannot agree on is whether US stocks are in a bubble. The gains in US stocks this year have gotten so intense that you're now seeing on the front page of like the Wall Street Journal, a bunch of articles about bubbles, bubbles, bubbles. We're in a bubble.

And I think that we're in that camp, Katie, when we talk about it. There's some stuff that looks exuberant, but that bubble feels too far. And there are really legs to this bull market so far. And I think in particular, Katie, we want to talk about five things.

Sentiment, AI, interest rates, concentration, and the economy.

Starting with sentiment, right? I think the general intuition people have is that you want to be greedy when others are fearful, fearful when others are greedy. So why is this a positive indicator, Katie? Sentiment is really aggressive right now, really optimistic. Why shouldn't that make me bearish? Why should that make me bullish?

Katie Martin (2:57)

Well, look, maybe it should make you bearish. As you say, people love to take the other side, you know, in the market's parlance of whatever the prevailing mood is. And so there is this idea that, you know, you buy when people are miserable and you sell when people are overly happy, but that is really not working out at the moment. You know, the kind of small band of remaining bears that are out there just keep on getting their asses handed to them, and it's getting really quite uncomfortable for them. So I'm finding it difficult to pick out bearish reports from the big investment banks or the big investment companies at the moment. So it just really feels like this positive sentiment is grounded in something real this time. It's not just kind of hope and optimism. There are genuinely decent earnings and some spectacular earnings, and this is firing this whole thing along.

Ethan Wu (3:46)

Yeah, and I think it's that when sentiment gets really aggressive, you, the bear out there, don't really have a choice. You gotta get on board or you're going to miss your benchmarks for the year, right? It's sort of the curse of everyone being benchmarked against the market is if you decide everyone's happy, so I'm going to sit out, your performance is gonna look pretty bad that year.

And so just to put some numbers to it, the common sentiment survey people look at is one from the American Association of Individual Investors. They put out this weekly data set on how investors are feeling about this market, are they bearish on that or bullish on that? And that survey is now at the top decile of historical bullishness, which is not, you know, that's not as crazy as it's been, but that shows people are feeling pretty decent out there. There's a lot of anticipation of good news. This sentiment indicator has increased pretty sharply in the last couple of weeks, so I think that really kind of shows where the market's head is at.