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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: I'm Stephen Carol and this is Here's Why, where we

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Speaker 2: take one new story and explain it in just a

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Speaker 2: few minutes with our experts here at Bloomberg. All time

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Speaker 2: highs on the S and P five hundred, the Dow.

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Speaker 3: Jones Industrial average up more than seventy points or two

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Speaker 3: tenths of a percent. That's a record high. The S

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Speaker 3: and P five hundred up almost thirty points or four

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Speaker 3: tenths of one percent.

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Speaker 2: That's a record high.

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Speaker 3: The NASA composite about one hundred and sixty points or

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Speaker 3: seven tens of one percent, that is also a record high.

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Speaker 3: Everything is awesome.

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Speaker 1: Yeah, it's interesting to see the momentum continuing to the upset.

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Speaker 1: A lot of reason for us to be very bullish

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Speaker 1: on US equities in this moment.

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Speaker 3: What the concern of the market is be in some

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Speaker 3: sort of world bubble.

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Speaker 2: We understand the excitement about the hyperscalo, but if you

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Speaker 2: look outside of the hyperscalo, life in industrial America isn't great.

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Speaker 2: For months, story on stock markets has been one of

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Speaker 2: record high after record high. The S and P five

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Speaker 2: hundred had its best September in fifteen years. Surprisingly positive

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Speaker 2: economic data, lower interest rates, and the rush into artificial

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Speaker 2: intelligence have all helped repeatedly push indexes to new heights.

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Speaker 2: But for all the screaming optimism, there are also quieter

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Speaker 2: concerns that shares may have risen too high, too fast.

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Speaker 2: Here's why the stock market rally is starting to show cracks.

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Speaker 2: Our Markets Live Managing editor Christine Aquino joins me. Now

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Speaker 2: for more, Christine, can you, first of all put this

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Speaker 2: rally in context for us in terms of what we've

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Speaker 2: seen up until the end of September. How big has

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Speaker 2: it been?

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Speaker 1: Well, Stephen, I mean it has been a blockbuster year

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Speaker 1: for US stocks that cannot be denied. As you mentioned,

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Speaker 1: a record hig after record high, we've seen twenty nine

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Speaker 1: closing record highs. Actually for this year, the S and

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Speaker 1: P five hundred is up fourteen percent this year, so

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Speaker 1: that is set for its third straight annual gain, and

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Speaker 1: historically speaking, the fourth quarter also bodes well for it.

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Speaker 1: This index. It has gained in this period for all

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Speaker 1: but one year in the past decade, and most signs

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Speaker 1: are pointing to another finish in the green for this

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Speaker 1: index for the end of this year.

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Speaker 2: Now, we've talked before about how the calendar months of

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Speaker 2: the year can give us trends for markets. But this

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Speaker 2: has been going on longer than just the good month

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Speaker 2: of September. What are the key factors that have driven

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Speaker 2: this rally.

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Speaker 1: Well, obviously, big tech is of course still a major

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Speaker 1: driver of the gains in the S and P five hundred,

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Speaker 1: given that a lot of those advances that we've seen

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Speaker 1: this year very much concentrated in the stocks that belong

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Speaker 1: to the Magnificent seven club. But you know, I was

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Speaker 1: looking at it, and really what we've seen is a

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Speaker 1: broadening of this rally, particularly since April. You know, some

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Speaker 1: measures of market breath has significantly improved since then. And really,

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Speaker 1: when you look at the year as a whole, all

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Speaker 1: major sectors in the S and P five hundred are

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Speaker 1: in the green and so you know, tech of course

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Speaker 1: contributing the most gains, but everything else is firing on

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Speaker 1: all cylinders.

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Speaker 2: So then what are the signs that investors are starting

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Speaker 2: to worry about.

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Speaker 1: Well, you know, we look at typically positioning in the

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Speaker 1: options market for this sort of sign of caution among investors,

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Speaker 1: and there are some you know, if you look at,

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Speaker 1: for instance, the VIX index, which is what we call

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Speaker 1: the fear gauge of the S and P five hundred

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Speaker 1: that is still near the year's lows, but we are

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Speaker 1: seeing some pockets of caution cropping up, like very recently

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Speaker 1: we've seen, for instance, a single trade paying about twelve

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Speaker 1: and a half million dollars to protect against a doubling

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Speaker 1: in the VIX, which is, you know, it's one of

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Speaker 1: these outlier scenarios that probably won't unfold when we think

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Speaker 1: about probabilities, but it's something that people are starting to

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Speaker 1: think about as a scenario that is worth paying attention

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Speaker 1: to at the very least.

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Speaker 2: So how widely held then could we say these concerns are.

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Speaker 1: Yet the bone. It doesn't seem like anyone in particular

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Speaker 1: is very much in a mood to sell the SAP

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Speaker 1: five hundred outright, and so it really is just more

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Speaker 1: about what we're seeing in the options markets and how

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Speaker 1: people are kind of hedging against that risk even as

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Speaker 1: they're still buying the index outright. And so these really

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Speaker 1: are kind of where you look for the initial signs

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Speaker 1: of that sort of caution. Of course, given the way

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Speaker 1: that the index, the S and P five hundred has

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Speaker 1: moved recently, doesn't seem like anyone's happy to sell, but

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Speaker 1: they're also starting to think about protecting their long positions

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Speaker 1: currently when it comes to investor positioning.

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Speaker 2: Now, we love getting a bit of history from you

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Speaker 2: as well when we talk to you, Christine, What have

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Speaker 2: the past rallies and stock markets taught us about how

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Speaker 2: they end? Typically?

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Speaker 1: Yeah, you know, when we look at the boom and

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Speaker 1: bust cycles in the past ten years in the equity markets, right,

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Speaker 1: the end rallies have typically been brought on by two

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Speaker 1: kinds of things. Right, So, one is kind of a

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Speaker 1: sudden acute shock that tends to catch markets off guard,

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Speaker 1: either because they were poorly positioned for it or they

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Speaker 1: didn't quite know how to position for it in the

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Speaker 1: first place. So I'm talking about, for instance, the Volmageddon

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Speaker 1: incident in twenty eighteen, where a lot of investors were

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Speaker 1: kind of caught in in these short volatility structured products

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Speaker 1: that were pretty complex financial instruments that perhaps maybe investors

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Speaker 1: were ill prepared to be positioning in. And then, of

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Speaker 1: course we had the COVID pandemic in twenty twenty, which

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Speaker 1: was something that kind of seemingly really took markets off guard.

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Speaker 1: And then of course more recently, we had the US

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Speaker 1: tariff unveiling in April. Now, this was well flagged, of course,

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Speaker 1: but I think it was just one of these sort

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Speaker 1: of events where investors didn't necessarily prepare for beforehand just

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Speaker 1: because they didn't have the details. They didn't have the

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Speaker 1: information up until it was unveiled.

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Speaker 2: So then, what kind of data point or event should

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Speaker 2: we be watching out for that could provoke a reversaland

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Speaker 2: stocks this time around?

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Speaker 1: Well, I think what we're seeing at the moment is

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Speaker 1: a foundation for caution being laid out, primarily because of

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Speaker 1: a data that we've seen when it comes to a

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Speaker 1: weaker US labor market. That's something that's kind of been

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Speaker 1: playing out for months now. FED Chair Jerome Powell has

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Speaker 1: warned about it in his recent commentary, as have his

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Speaker 1: colleagues on the Federal Reserve, and that's something that markets

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Speaker 1: are coming to accept at this point, right, But that's

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Speaker 1: not necessarily something that could provoke a sudden decline in stocks.

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Speaker 1: What it is doing is just kind of laying the

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Speaker 1: groundwork for a bit more caution as what we're seeing now. Now,

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Speaker 1: what could potentially turn that into a sudden pullback is

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Speaker 1: something else that introduces that sudden shock that we were

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Speaker 1: talking about earlier, right, and in this particular moment, the

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Speaker 1: government shutdown in the US has potential to do that.

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Speaker 1: If it's something that lasts beyond what investors are anticipating,

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Speaker 1: that could potentially provide a spark for that sudden downter

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Speaker 1: because all of a sudden, you have a weaker labor

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Speaker 1: market narrative combining with a longer than expected shutdown.

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Speaker 2: Yeah, the so called black swans on markets things always

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Speaker 2: to watch out for. Christine, great to talk to you.

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Speaker 2: Christina Quino are managing editor for Markets Live. For more

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Speaker 2: explanations like this from our team of three thousand journalists

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Speaker 2: and analysts around the world, go to Bloomberg dot com

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Speaker 2: slash explainers. I'm Stephen Caroll. This is here's why. I'll

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Speaker 2: be back next week with more. Thanks for listening.