Vibrational movements in the market

Rob Armstrong (0:06)

Pushkin. Something has changed. The air feels different. The barometer is dropping. It feels like the stars are realigning. The winds are shifting.

Aiden Reiter (0:21)

Were you about to sing the Wicked intro? Something has changed within me.

Rob Armstrong (0:27)

As it happens, I was about to burst into song, but you ruined it. This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, Chairman of the Board and Acting CEO of Unhedged, Inc. On the Acting? Joined by my obstreperous Chief Financial Officer, Aiden Reiter.

Aiden Reiter (0:52)

So it sounds like what you were talking about before, Rob, was the market's vibe shift.

Rob Armstrong (0:56)

Yeah, we have had a vibe shift. Let's talk about that for a second. What have we been seeing? What are the actual data that constitute what we're calling a vibe shift here?

Aiden Reiter (1:05)

So maybe the best indicator is we had a market drop last Friday. It was about 1.7%, nothing crazy.

Rob Armstrong (1:12)

Not the end of the world. Not the end of the world.

Aiden Reiter (1:15)

Biggest of all, bigger even than when we had DeepSeek. And what seems to have been the cause was a build up of bad economic data, specifically a consumer sentiment survey that came out on Friday. It showed that the housing market is not doing great, showed the consumers are feeling really, really bad about the economy.

Rob Armstrong (1:33)

Yeah, or worse. Worse, yeah.

Aiden Reiter (1:35)

Worse than they had for a while. And that somewhat pushes against the narrative that we had of early Trump days. A lot of the 2025 outlooks said this is gonna be great for growth, he's gonna boost domestic spending.

Rob Armstrong (1:46)

I would even say, we had a certain amount of that in the newsletter and on the podcast. I mean, there was good reason to expect growth under Trump. Deregulation, tax cuts, maybe some other stimulative fiscal activity, things of this nature.

Aiden Reiter (2:01)

But those things have not happened whatsoever. Instead, we've just had a lot of threats about tariffs that have not really come to pass. Again, tariffs could be good for growth, they also could be bad for growth, juries a little out. It's definitely good for domestic stocks and domestic focused companies like small caps, but they haven't seen that bump.

Rob Armstrong (2:20)

I'm glad you mentioned small caps because that has been a big part of the vibe shift. Small caps, which were briefly the darlings of the Trump trade, have been acting like doodoo.

Aiden Reiter (2:30)

Yeah, mid caps and small caps have just been like sliding down while the broader market is just flat.

Rob Armstrong (2:36)

So the idea is, you know, big caps, 40% of their revenue canonically comes from abroad. Small cap and mid cap US stocks are very domestically focused. If you thought America was going to get tired of winning, you'd expect the small and mid caps to outperform the big caps, but we have seen the opposite.

Aiden Reiter (2:57)

And they're also theoretically more sensitive to economic growth within the United States for that reason. So if you have boosted growth, higher tariff walls, small and mid should do better. That hasn't happened. The market is not saying that these things will not happen, but none of these things have happened yet.

Rob Armstrong (3:11)

It's just repricing them a little bit.

Aiden Reiter (3:12)

Yeah, we haven't seen any of these policies yet. Instead, we've just gotten threats of tariffs. We've gotten some very quixotic and interesting things about the Ukraine War, which markets care about, but maybe not so much. And we haven't really gotten anything that would make investors believe that Trump is focusing on tax cuts and focusing on deregulation. It hasn't been the day one agenda. Instead, on balance, we've only gotten things that are theoretically bad for economic growth. Immigration enforcement. We've gotten a lot more statements on that. We've seen, at the same time, some bad economic indicators, as I said.

Rob Armstrong (3:48)

Yeah, we didn't mention another. We talked about the consumer surveys which have been poor, but we also got ISM services. Of course, regular listeners to the show will remember that it is the services end of the US economy that's really been holding things up. And the ISM survey of businesses had a nasty slowdown in its last reading. We're close to 50, meaning no longer an expansion.

Aiden Reiter (4:15)

Yeah, it dipped into contraction. And it's the first time it's contracted in, I believe, four years.

Rob Armstrong (4:19)

Yeah, so that was bad vibes too.