Pepsi Goes Flat & Uniqlo’s T-Shirt Empire

John Crotteau (0:02)

Is Pepsi losing its grip on American soda drinkers? We have the latest from earnings.

Hanna Horvath (0:07)

And stocks are at highs, bonds are at highs. What is the market trying to tell us right now?

John Crotteau (0:11)

For Thursday, October 8th, it's Brew Markets Daily. I'm John Crotteau.

Hanna Horvath (0:15)

And I'm Hanna Horvath. Let's get moving and groovin.

Welcome. Later in the show, we are going to explore Uniqlo's very profitable push into North America. But first, it's Thursday, which means it's time for our weekly macro roundup, where we try to answer the question, what kind of economy are we in right now? Because this week, depending on which part of the market you look at, you could get two very different answers.

John Crotteau (0:42)

That's right. Stocks seem to think we're heading toward an AI-powered golden age. The bond market looks considerably less relaxed.

Hanna Horvath (0:49)

Yes, exactly. Let's start with the top line here. Markets are still putting a roughly 80% chance on the Fed holding rate steady at the end of October after hiking back in September. Though Fed Governor Chris Waller said this morning that more hikes are probably needed, but they don't necessarily have to come at every meeting. So October may be a pause, but December is still very much in play. But while that conversation is about what the Fed does over the next few months, longer-term bonds have been spending the past couple of weeks asking a much bigger question, which is what does the next decade look like? Which brings me back to the markets. Stocks and bonds right now appear to be living in two completely different realities.

John Crotteau (1:25)

Yes. So Hanna, what is going on?

Hanna Horvath (1:27)

So earlier this week, the S&P 500 and the NASDAQ hit fresh records fueled by that AI enthusiasm and expectations for another huge earning season. But today, they are pulling back a bit as oil and bond yields are rising, but they are still coming off that record territory.

Meanwhile, the 10-year treasury yield is about 5.3% right now, near its highest level since 2002, and the 30 years hovering near 5.7%.

John Crotteau (1:50)

So which market has it right? Are stocks telling us everything is awesome or are bonds flashing a warning sign?

Hanna Horvath (1:56)

I actually think what's happening is that they are looking at two different sides of the same economy. Stocks are focused on the upside right now. Companies are spending enormous amounts of money on AI, profits are growing, and investors are betting that eventually all of this is going to produce higher productivity and even bigger earnings. The bond market is much more focused on what it is going to cost to get there.

Longer term yields reflect inflation and economic growth, but also how much investors want to be paid to lend money for 10 or 30 years.

John Crotteau (2:23)

So AI is showing up on both sides here, it's helping drive the stock rally, but building all of it requires an absurd amount of money.

Hanna Horvath (2:30)

Yes, and we are getting a pretty good stress test of that bond market this week. The treasury sold nearly $120 billion of debt over the past three days, including 39 billion of 10 year notes yesterday and 22 billion of 30 year bonds today. And interestingly, buyers were showing up. Yesterday's 10 year auction cleared at a 5.3% yield, as we said, with the highest bid to cover ratio in about a decade. Investors outside of big Wall Street dealers took on almost all of that debt. Today's 30 year auction was a little bit less enthusiastic, but still very solid. Treasury sold the bonds at about a 5.6% yield and investors bid for about 2.54 times the amount available. That was slightly weaker than last month, but importantly, there was no big buyer strike here. So essentially, after all this hand wringing about whether anybody was actually going to want to own US government debt, apparently the answer is yes, if you pay them enough.

John Crotteau (3:19)

So these higher yields are actually making bonds more attractive to investors again. But this is also a pretty painful reminder that bonds, especially long-term bonds, aren't always that stable part of your portfolio that we sometimes make them out to be. As regular investors, if stocks are getting hyper concentrated and long-term bonds are suddenly swinging around, does the classic diversified portfolio actually protect us anymore?

Hanna Horvath (3:42)

Yeah, so diversification itself is not dead. But those traditional models, like that 60-40 portfolio, are starting to offer much less protection because stocks and bonds are increasingly exposed to those same structural macrophoreses. So not only are your bonds moving in lockstep with your equities, the stock portion of your portfolio is likely far more concentrated than you might realize. Take the S&P 500, for example. Yes, you technically own 500 companies. But because the index is weighted by market value, the heavyweights are owning the room. Case in point, the top 10 largest stocks alone command nearly 38% of that entire index.