Prof G Markets
00:21:56 · Ed Elson
[00:21:56] S3: We're back with Prof G Markets. Markets are beginning to feel a chill in the air. The Nasdaq one hundred fell nearly 3% on Thursday, its worst day since June, as worries about how big tech will pay for the AI build out hit tech stocks. The same fear showed up in the corporate bond market. Corporate bond yield premium surged to their widest levels since May 2025. Meanwhile, investors moved back into treasuries, pushing the ten year yield below 5% for the first time in a month. Now stocks did rise yesterday, but the S and P and the Nasdaq are coming off of two weeks of losses with big tech earnings and a Fed meeting still ahead this week. So the question for investors, is winter coming for the market? Joining us to discuss this, we're speaking with Robert Armstrong, US financial commentator for the Financial Times and author of the Unhedged newsletter. Rob, good to see you. You wrote that last week's, quote, epic treasury rally and the accompanying route in tech stocks had the feeling of a turning point, the sudden arrival of winter after a long summer. Very general question that you posed in in your piece. Is winter coming for stocks?
00:23:13 · Robert Armstrong
[00:23:13] S6: I think it's really important that the ten year and the thirty year yield went up last week when stock markets were faltering. Because if you remember, it was hardly a week ago when all bad things were being done by treasuries, and treasuries were trash. The US fiscal system is unsustainable. Inflation is out of control. These things are monstrous. They only go down. And with that as the context, things got spooky enough in equities that people started buying the crap out of treasuries anyway. Like, you know, we had, like, a 19 basis point day on the ten year last week. I can't remember the last 19 basis point day when the yields went down that much. People were really buying this stuff. And by the way, the bad feelings about the bond market may have been overdone. Right? When when you can get in real terms, in inflation adjusted terms, you're talking about two to 3% from the bond market. I'd say that's pretty good. And so it's it's not like there was an irrational rush into bonds, but this fast change of mood, I think, really told you something. And that was, you know, and that's extremely striking. That's point number one. And I'm rattling on here, but I'll get it all out, and then you can respond. Point number two is that cracks had really been appearing in the equity markets for quite a while before this happened. So as we've discussed on this show before, I believe, the Nasdaq and the S and P five hundred have been heading in a herky jerky way sideways for six months and since May. But below that, we have seen the market behaving in a way that is consistent with the end of a cycle and is consistent with higher bond yields putting pressure on them. So we've seen things like... One of the examples I pointed out last week was there was this group of industrial stocks, like GE Verona, and Caterpillar was one of them, and Comfort Systems. These were all the industrial stocks that sort of benefit from the AI boom. They like put the cooling and electronic systems into... And the construction part of the data centers. Great. Those had an unbelievable run. A lot of them doubled. Well, they've been doing like crap since May. Right? And, you know, the small cap stocks have been doing terrible. A lot of the interest sensitive parts of the S and P, utilities, real estate, those have been doing badly.
00:26:04 · Robert Armstrong, Ed Elson
So it was like, you know, more and more work was being done by the big tech stocks. And last week, those started to crack. And we saw the response in bond yields, and it's like, okay. Something is different as now. It's not all unicorns and rainbows and, hard candy at this point. You know? It's like something feels different. So I'm not calling for a crash, but the the euphoria is broken. There's a much more realistic, much more wary, set of fundamental action... Price action going on in the stock market now. And that remains true today even though we had a pretty decent day today in markets, I would argue. [00:26:49] S3: It seems that the the ten year is is really the the the crucial thing to look at. And just to be clear for everyone, you know, beginning of the month, we were at 5.3%. And I'm gonna take my little victory lap here, which is that on October 5, I said that this was the end of the sell off, and my prediction was we're gonna see the yield come back down, and and we'll see bonds rally. That is what's happened. We're we're now down below 5%. [00:27:18] S6: Yeah. That is a huge move. Just for re... Readers who don't follow the stock market, that's like a 15% move in the stock market would be a equivalent size. This is a shift.
00:27:18 · Robert Armstrong, Ed Elson
[00:27:18] S6: Yeah. That is a huge move. Just for re... Readers who don't follow the stock market, that's like a 15% move in the stock market would be a equivalent size. This is a shift. [00:27:30] S3: Yes. You know? Huge shift. And I guess the the question is is why is that happening? And it's probably a combination of both things. It's probably that the bond sell off was overdone, And then at the same time, there is a legitimate concern around the equity markets, specifically around its reliance on AI. It seems that investors are beginning to get jittery. And so in that environment, why would you not lock in decent yields, move into the safer bond markets, which is kind of everything that you would expect from a market that is reacting to a boom and bust cycle? And so in a lot of ways, it almost seems like, yeah, this is this is what's supposed to happen. The boom happened, and now investors do this.
00:28:14 · Robert Armstrong
[00:28:14] S6: Yeah. No. It makes sense. Yeah. And, you know, and it's supposed to be that when when equities get jumpy, bonds do a little little bit better, and they have, and that's really nice. And there's more evidence for your claim that this is a flight... There's part of this is a flight to equity trade, which is the staple stocks would have been... Which have been, like, the worst performing stocks in global markets, in general, in The US market. So I'm talking about the people who make paper towels and deodorant and tomato sauce. Right? The the real consumer basics, tobacco, whatever. These... You know, this industry, especially in The United States, has been having its struggles just to grow. And so that's one reason it's been doing it. But nobody wants anything to do with these very safe, boring companies. Look at how those performed in the last week or two. Over the whole world, it... It's like the the line just, like, leaps off the chart all of a sudden. Right? So that's fear at work. When you're starting, like, maybe I'll sell that tech stock and buy Kimberly Clark. That's the... That's fear talking
00:29:26 · Ed Elson
[00:29:26] S3: right there. You know? Until Kimberly Clark pivots to data centers in in some way, which I don't think is off the table. I think the... Perhaps the the the most jittery signal that we got last week, I think, came from Elon Musk. He he posted this this tweet on X, which I'd like to read to you and get your reactions. He said, quote, as of the past few weeks, debt markets have almost entirely shut off access to the money for any company that doesn't have revenue independent of AI data centers. He continued. He said that means 200 plus neo clouds are going to see Guppy level death and consolidation. Some will make it through, but not many. He seems to be saying something which I think I agree with, which is that the bond markets are deciding, okay. We're anxious about this data center build out now. And without us, a lot of you guys are screwed. A lot of you guys need us in order to to build these things, which would suggest as he as he puts forward that some of these smaller newer AI names, the neo clouds that have just become very hot and popular, that they actually risk genuinely going out of business. And perhaps that's how the trade unravels. What do you make of his comments?