Why so down, S&P 500?

Ethan Wu (0:01)

Bonds are back.

Katie Martin (0:03)

And so is All the Credit, P.

SPEAKER_3 (0:05)

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Ethan Wu (0:36)

Thank Pushkin.

Remember last week's massive 4.9% US GDP number? Well, stocks don't like it. The S&P 500 has officially entered correction territory, down more than 10% from the peak on July 31st. It's weird, it's a strange combination of hot growth and falling markets. Today on the show, we discuss why stocks are feeling so bothered in this hot economy.

This is Unhedged, the Markets and Finance show from the Financial Times and Pushkin. It is Tuesday, October 31st, 2023 I'm reporter Ethan Wu, here in the New York studio, joined by FT Markets editor, Katie Martin, to describe the spooky Halloween we're having in markets.

Katie Martin (1:19)

Terrifying times, Ethan.

Ethan Wu (1:21)

But I feel like you're dressed for it. Katie, I know this is not a visual medium, but Katie is wearing a scarf adorned with orange tassels.

Katie Martin (1:28)

And a black dress. I'm as scary as I get right here.

Ethan Wu (1:34)

Well, speaking of scary, let me read you some of the things that are coming into my inbox from the markets and econ research world. Okay, these will really frighten you.

From Ned Davis Research, is a 7% 10-year treasury possible?

Katie Martin (1:47)

What?

Ethan Wu (1:47)

Long view economics. From a price action perspective, most parts of the US equity market are consistent with an economy that's about to roll into recession.

Morgan Stanley, risky markets trade as if the current level of risk-free rates is too high to handle. I'm panicked, Katie. I'm having a panic attack.

Katie Martin (2:01)

Are you going to dress as the S&P 500 when you go trick-or-treating this evening?

Ethan Wu (2:07)

A colleague actually recommended I dress as the yield curve, and I asked what that meant, and she just like bent her body like in an arc, like put her hands forward.

Katie Martin (2:15)

Niche.

Ethan Wu (2:18)

Anyway, I think broadly we can break down what's going on in markets into three categories, Katie. Valuations, recession, and rates.

Katie Martin (2:28)

Yeah.

Ethan Wu (2:29)

Why don't we start with valuations?

Katie Martin (2:30)

Well, why don't we start with, you know, what is not eating stocks? If you had said to me at the start of the year, we will have two banking crises and two actual wars, and five percentage points of Fed rate rises to deal with, what will stocks do in the US this year? I would not have said, don't worry about it, Ethan, they're gonna be up 8.5% by Halloween.

No, sir. So, you know, this is one of the things that investors are talking about a lot at the moment, which is, yes, this environment is pretty grim, but it could be a hell of a lot worse based on the kind of news flow that we're seeing. So, you know, there's a lot going on there. But yeah, it has all gone, as we Brits say, a little bit peatong over the past...

Ethan Wu (3:14)

What?

Katie Martin (3:15)

Just Google it. Just go, trust me. Trust me on this. Google it.

It's all gone a bit peatong in the market. It's all gone a bit wrong.

Yes, and P, as you say, is down 10% from its peak in July. And, yeah, valuations are a decent part of that, right? You know, you can't get away from the fact that we've had an extraordinary start to the year, like a massive run up, particularly in US stocks, and it's all just unraveling a bit.

Ethan Wu (3:40)

I think that is the right point to make. A correction can still leave stock markets in a pretty decent shape when you zoom out and take the bigger picture. But I do think, you know, one of the... To move it to the valuations point, the big swing factor has been big tech.

And they're both responsible for a lot of the upside earlier this year, and now also a lot of the downside.

Our colleague Nick McGaugh had a great piece in the FT just a couple of days ago, making the point that not just in US markets, but in global equity markets, big tech make up all of the year's gains. It's like a truly extraordinary fact that like seven companies, all household names, everyone knows, are making up all of the gains in all stocks everywhere. It's really just, it's incredible.