Markets resume previously scheduled exuberance

Katie Martin (0:06)

Pushkin. You know that feeling when you turn your back for 10 minutes and all hell breaks loose? Well, that. I went on holiday, very nice it was too, and the markets went loopy. Adding to the loopiness, they're pretty much back to where they started. How on earth does that all make sense? Today on the show, keep up at the back, the market mini crash is old news. We're gonna talk about why markets have recovered and what it all means.

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at FT Towers here in London. And I'm happy to say I'm joined by the estimable and finely dressed Rob Armstrong. Rob, I have decided for one week only to be nice to you, not least because you're out of the studio this week. So you've got a slightly wobbly internet connection. Where on earth are you?

Rob Armstrong (1:00)

I have been drawn out to Eastern Long Island by family business. And so it appears they've just discovered the internet out here. And if it sounds like I'm talking to you through two cans and a piece of string, that is why.

Katie Martin (1:18)

Now, have you gone out there because you're hiding from the market turmoil and you've decided to buy tinned food and guns?

Rob Armstrong (1:24)

I just couldn't take the pressure anymore, Katie.

Katie Martin (1:27)

What did you do to the markets while I was away? I mean, it all went wrong.

Rob Armstrong (1:33)

I think the basic story is familiar right now. The markets fall in the United States on a Friday. On the Monday, Japan's market starts freaking out. Everyone starts saying the phrase, carry trade, carry trade, carry trade, again and again. And then the whole situation starts feeding on itself, and global markets fall whatever they fell, 6% in very short order, and now have bounced back. But I think what readers might be wondering, Katie, is that given that this was now a couple of weeks ago, why are we still talking about this? 6% between friends, we bounced back, we were back where we were.

What's of interest here?

Katie Martin (2:16)

I mean, since I got back from my holes, it's still the number one topic of conversation in markets. Everyone's kind of looking around, investors and analysts at banks or whatever, and are basically saying, what the hell just happened? Does this tell us something about how robust markets really are? They've kind of, stock markets have been just one way traffic higher for the longest time. And these little episodes make you think, hang on a minute, are we, is this all just built on sand? Are we just like hurtling towards a disaster?

Rob Armstrong (2:48)

I think that's correct. I'm looking here at some data about the S&P 500, and half of the total gains in this bull market, this is a much quoted stat, but it remains true. Half of the total gains in this bull market, which started back last October, are from 10 stocks. So there's like a small number of stocks powering a huge rally. You know, the market is up more than a third, you know, over the last year. You have a few stocks that are doing it, and what's powering those stocks up is not just earnings, it's expansion of valuations. About half the gains are down to increases in valuation rather than increases in earnings or earnings expectations. So you have a highly concentrated valuation driven rally that's gone on for a long time now, and what happened a few weeks ago makes you think, maybe this is all a little spooky.

Katie Martin (3:47)

It makes you think, hmm, can you spell bubble? Yeah, exactly.

Rob Armstrong (3:53)

Yeah, there's three Bs in that as far as I know.

Katie Martin (3:55)

It feels bubbly. Yes. But so one thing that I think is interesting and that you were writing about in your newsletter today is that we've had a bounce back, right? So the bond market is slightly doing its own thing, perhaps we'll come on to that in a little while, but stocks are pretty much back where they started. So you had, for example, one day again while I was sitting on my son Lanja, enjoying myself, not thinking about markets, Japanese stocks fell 12 percent in a day. That is a lot. But they've got their boots back on, other markets are pretty much back to where they started. Now, is this actually a recovery or does the flavor of bounce back not quite match the flavor of the drop, if you see what I mean?