Stocks Work Best at Night (EP.242)

Episode Summary

Executive Summary: The episode focused on macro volatility, rate hikes, bond flows, and whether inflation and Fed policy are changing market behavior more than the economy. The hosts argued that investor flows may still cap bond yields, that overnight market gains are largely mechanical rather than conspiratorial, and that huge platform companies like Apple and Microsoft are increasingly in a class of their own. They also discussed crypto, housing, Robinhood, and media recommendations.

Main Topics: Bond flows, inflation, and interest rates (Priority: 5/5): The episode opened with YCharts flow data showing fixed income receiving the largest 2021 inflows, leading to a discussion of whether heavy investor demand can keep bond yields capped even as the Fed hikes rates and inflation rises. Market volatility and the state of stocks (Priority: 5/5): The hosts reviewed the breadth of the selloff in small caps and growth stocks, arguing that the market is far more volatile than it appears and that stock-picking has become less attractive as individual names can diverge sharply from indexes. Fed policy, inflation psychology, and historical analogies (Priority: 5/5): They debated whether the Fed’s actions materially affect the real economy or mostly move markets and expectations, and whether historical market patterns still apply in a post-pandemic environment with altered inflation dynamics. Mega-cap earnings: Microsoft and Apple (Priority: 5/5): Microsoft and Apple were highlighted as exceptional businesses with strong growth, margins, and ecosystem power, increasingly operating as a separate class from traditional growth stocks. Robinhood, fintech, and platform durability (Priority: 4/5): The conversation examined whether Robinhood is a zero or simply a deeply discounted growth company, with debate over its tech, demographic appeal, product gaps, and whether incumbents like Schwab might just wait it out. Housing, real estate, and consumer stress (Priority: 4/5): They discussed falling refi activity, rising rents, inventory shortages, and the challenge of homeownership affordability, while also noting innovations like EasyKnock and the difficulty of disrupting real-estate agents. Cultural and personal reflections on happiness and entertainment (Priority: 3/5): The episode ended with broader reflections on pandemic-era unhappiness, internet-driven cynicism, and movie/TV recommendations including Ozark, Swan Song, Station Eleven, Apocalypse Now, and Caddyshack.

Key Arguments: Fixed income still dominated 2021 fund inflows, suggesting investors—not just the Fed—remain major buyers of bonds. Small-cap and growth-stock drawdowns show that many stocks are already in bear markets even while the S&P 500 looks resilient. Individual stock picking has become less appealing because the downside from selecting the wrong name is too large relative to the diversification benefit. Fed policy seems to matter more to financial markets and expectations than to immediate real-economy outcomes. The stock market and long-duration assets should be viewed as highly sensitive to discount-rate changes, so repricing can happen faster than history suggests. Overnight stock-market gains are not evidence of manipulation; they likely reflect global markets, after-hours news flow, and macro releases outside trading hours. Apple and Microsoft are no longer just “growth stocks” but durable, ecosystem-driven mega-companies with unmatched scale and profitability. Robinhood may be impaired but is unlikely to be worth zero given its technology, user base, and still-open growth avenues. Housing is constrained by low inventory and rising prices, while many traditional disruption efforts in real estate have failed or stalled. The pandemic and the internet have likely contributed to lower happiness and more cynicism, even for people with objectively good lives.

Data Points: Russell 3000 constituents: 2,700 - Approximate number of stocks in the Russell 3000 at the time of discussion. Stocks down from 52-week highs: ~800 stocks - About one-third of Russell 3000 names were down 40% or more from their 52-week highs. Stocks down 50% or worse: ~20% of stocks - Roughly one in five stocks in the Russell 3000 was down 50% or more. Russell 2000 drawdown: Bear market - Small caps entered their fifth bear market since 2008. Small-cap bear market count since 2008: 5 - Bear markets occurred in 2011, 2016, 2018, 2020, and 2022. S&P 500 drawdown from highs: ~6% to 7% - The index remained relatively resilient versus the broader market selloff. Five-day average market volatility context: 32% average downside historically - When volatility is at current levels, markets were historically down about 32% on average. Current market drawdown during volatility reading: 10.5% - The market was only down 10.5% despite volatility levels usually associated with much larger declines. Microsoft revenue growth: 20% - Quarterly revenue growth reported by Microsoft. Azure and cloud services growth: 46% - Microsoft’s cloud growth was a major driver of the report. Office 365 growth: 19% - Microsoft’s productivity suite continued growing strongly. LinkedIn revenue growth: 37% - LinkedIn posted record revenue growth in the quarter. Apple iPhone revenue: $71 billion - Apple’s iPhone business remained enormous and grew 9% year over year. Apple services revenue: $19 billion - Services grew 24% and represented a major profit engine. Apple wearables/other revenue: $15 billion - Watch and AirPods revenue grew 13%. Apple gross margin: 43.8% - Highlighted as extraordinary given Apple’s scale. Apple revenue: $124 billion - The quarter was framed as massive, with roughly $124 billion in revenue. Apple stock buybacks: Shares outstanding down almost 40% since 2013 - Used to show large-scale capital returns. Supply-chain impact on Apple: $6 billion lost revenue - Apple said supply issues cost meaningful revenue in the quarter. Robinhood customer losses: $9 billion - Referenced as the amount customers lost in the third quarter. Robinhood assets: $100 billion - Used to argue the company is not worthless and still has a base of assets and users. Bitcoin price target: $1 million by 2030 - ARK’s bullish scenario discussed as an extreme but possible case. Bitcoin implied annualized return: ~40% per year - Return needed to reach $1 million from 2022 levels by 2030. Stablecoin share of crypto: Rising rapidly - Stablecoins were discussed as a growing share of crypto activity and possibly a bear case for Bitcoin adoption. Q4 supply shortages at Apple: $6 billion - Repeated as a constraint despite record performance. U.S. nominal GDP growth: 6.9% annualized real growth - Referenced as a major policy and recovery success. U.S. GDP on annualized basis: Quarterly growth annualized - The hosts questioned the reporting convention. Debt service as % of GDP: Near historic lows - Used to argue debt sustainability concerns may be overstated given low rates. Mortgage refi applications: Down 50% - Compared with over a year earlier as rates moved up. Redfin rents: Up 14% in December - Largest jump in over two years. General Social Survey: Since 1972 - The long-running survey was used to show declining happiness since the pandemic.

Pivotal Quotes: "Don't fight the boomers." — Michael Batnick / Ben Carlson: Used jokingly in the opening discussion about fixed-income inflows overpowering bond-market narratives. "I think this might be the bottom anyway. I think that's stock market already bottom. I'm 51% sure of that." — Michael Batnick: A humorous but tentative take on whether the market had already bottomed. "The Fed matters way more to markets than the economy." — Ben Carlson: Their central thesis on why rate hikes and Fed messaging move asset prices more than near-term real activity.

Implications: Listeners should expect more volatility, faster repricing in long-duration assets, and continued dominance by mega-cap platforms. Bond flows, Fed signaling, and inflation expectations will likely keep driving markets more than fundamentals in the near term.