A tale of two housing markets August 21, 2023 Sign Up | View Online IN THIS ISSUE 7 min read 🌶️ Hot stock valuations 🥵 Hotter inflation numbers 🔥 Hottest housing markets Around the time indie-bookshop owner Kathleen Kelly (Meg Ryan) was falling in love with a stranger on the internet who wanted to crush her business, investors were falling in love with AOL, only to end up heartbroken (i.e., poorer). Below, in the Big Important Story, we explain what this teaches us about investing. | Warner Bros. THE WEEK IN MARKETS Stocks are having an unpleasant August Isn’t there some saying about how rallies have many fathers but every sell-off is an orphan? Maybe we got that wrong. Anyway, last week people were definitely selling: the S&P 500, Nasdaq, and TSX all finished down about 2%. As a result, after a fairly ebullient summer, the S&P and TSX are both down 4% this month, while the Nasdaq is south 7%. For those looking for the parentage of the sell-off, the internet is awash in theories: China! A tech bubble! Interest rates! Whatever the cause, the sell-off has sent investors running toward anything that pays a nice yield, like money-market funds. But that could change quickly; just two weeks ago risky stocks were all the rage. It’s anyone’s guess how long this sell-off will last, but Nvidia’s Q2 earnings this week might give us a clue. More on that below. THE WEEK IN ONE NUMBER $813B Walmart’s worldwide sales last year, which is nearly twice as much as its nearest retail competitor, Amazon, raked in. Walmart could exceed those numbers this year, thanks to budget-conscious shoppers. Last week the company upped its profit outlook for the year by 2%. WHAT HAPPENED LAST WEEK IMPORTANT Inflation might be harder to deflate than we thought. StatCan announced Tuesday that Canada’s headline inflation rate rose to 3.3% in July, up from 2.8% in June. More encouraging, core inflation, which ignores volatile food and energy prices, fell slightly. Still, given inflation’s potential stickiness, pro investors are (according to Bloomberg data) no longer betting that the BoC will cut interest rates midway through 2024, as they’d previously hoped. Canada’s wildfire season keeps setting horrible new records. Over the weekend, wildfires encircled Yellowknife, and now something like 65% of the entire Northwest Territories’ population is displaced. B.C., meanwhile, declared a province-wide state of emergency, ordering 35,000 residents to evacuate. The blazes have caused incalculable damage to the environment, to humans, and to wildlife. But the economic damage is also sizable. Wildfires, which disrupt the economy in all sorts of ways, have dragged down Canada’s GDP by 0.1% this year, and that amounts to billions of dollars in losses. INTERESTING The housing market is a tale of two cities. Toronto is a tale of woe, where existing home sales dropped by 8.8% from June to July. (Turns out, buying a $1.1M one-bedroom is even less attractive with 6% interest!) Then there’s Calgary, where the market can only be described as hot hot hot. Sales are up 11% YoY, mostly thanks to out-of-province buyers fleeing places like Toronto. If you’re one of them, here’s some advice from Catherine Chow, a Calgary realtor, about buying in this market: “The cleaner the offer, the fewer the conditions, the shorter the timeline, the higher the chance yours will be accepted.” China’s sleeping giant hits the snooze button. The world’s second-biggest economy is in a rut. Industrial production, real-estate investment, retail sales — they’re all growing far more slowly than they were before the pandemic, and analysts worry that more trouble lies ahead. Western media has wrongly predicted financial doom in China before, but the situation is worrisome enough that last week China’s central bank announced that it will stop sharing some key economic data (not that anyone believes its data anyway). One thing to note: China’s slowdown matters a lot to China, but economists doubt it’ll inflict serious pain on the global economy. Fingers crossed. FROM OUR SPONSOR THE FOMO INDEX by Stacey Woods IMPORTANT 🤮 Expert sees no “feasible” solution for sewage overflow from Ottawa storms, only feces-able ones. Source 💼 Study finds Canada’s office vacancies peaking in 2024, so go ahead and book that Scotia Plaza dream vacation. Source 🤖 Hollywood studios say they won’t replace all striking writers with AI. Probably just the ones who can’t write Marvel movies. Source 💰 New Illinois law lets kid influencers sue their parents if they don’t put their earnings aside while they’re ruining their lives. Source CRASH & BURN TO THE MOON 🍁 Canada notably absent from China’s new list of approved tourist destinations. That’s fine; more ketchup chips for us. Source 🚫 Ikea recalls 127,000 blinds in Canada for potential choking hazard and promises to make the new ones less delicious. Source 🐊 What tastes like a shoe but wears like a Pop-Tart? Croc-Tarts, the new pairing from Crocs and Pop-Tarts! Source ☕ In other tastes-like-a-shoe news, Tim Hortons launches cold brew concentrate in stores across the U.S. Source WHO CARES WHAT’S UP THIS WEEK StatCan releases two big economic studies (Wednesday), the first on Canadian rental costs and the second on generational poverty in racialized communities. Summer camp for central bankers kicks off (Thursday) as U.S. Federal Reserve officials meet in Jackson Hole. Chair Jerome Powell’s speech is expected to signal to investors what to expect from the bank in its fight against inflation, and it could move markets. DON'T BE A TLDR HOG 🐷 Like TLDR? The first five million people to click this link can share it with a friend for free. (You can share it with enemies too but only if you’re ready for them to love you.) THE BIG IMPORTANT STORY ARTIFICIAL INTELLIGENCE Is There a Bubble in AI Stocks? We Might Find Out This Week On Wednesday, Nvidia, a California-based chip designer and the king of 2023’s AI gold rush, will announce its Q2 earnings, in what’s no doubt one of the most anticipated releases of the year. That’s because Nvidia’s quarterly results will give investors some idea as to whether they were justified in pushing the company’s value into trillion-dollar territory this year — and, more broadly, whether AI is living up to the hype that helped launch this spring’s market-wide stock rally. The enthusiasm over AI has cooled a bit in recent weeks, and chatter is growing about whether AI stocks are in a bubble. Nvidia’s earnings will begin (but only begin!) to answer the question. Let’s dive in: Expectations are very high Nvidia, for the uninitiated, makes the powerful chips required to train AI models, and that’s a good position to be in, since seemingly every tech company is racing to develop its AI capabilities. Nvidia generated US$7.19 billion in revenue in Q1 and said that it expected its revenue to jump by more than 50% in Q2. And that, analysts projected, could help the company more than double its year-over-year profits by the end of 2023. Investors’ sky-high expectations are reflected in Nvidia’s PE ratio — i.e., a measure of a stock’s value based on its price relative to earnings — which is well over 200. That basically means the market thinks Nvidia has a lot of long-term, money-making potential. (Tech stocks more commonly have PEs around 30.) As we explained not long ago, Nvidia’s soaring PE ratio might be justified if it really does double its profits this year and then continues to grow. But its PE might also suggest that it’s overvalued, in part since… … Super-hyped companies tend to disappoint Jeremy Schwartz, chief investment officer of WisdomTree, recently posted the results of a study that showed that, out of the 200-plus companies with valuations that were once in the neighbourhood of Nvidia’s, more than 90% underperformed the market over the following decade. One big reason, among several, for these disappointments is that whenever there’s a technological revolution, the market doesn’t always correctly guess which companies will benefit the most. In the dot-com era, for instance, the investors who piled into AOL were right that the internet would dominate our lives; they were just wrong that AOL would be part of that dominance. Investors also guessed that modem-maker Cisco, briefly the world’s most valuable company, would be the big winner of broadband expansion, when, in the end, Google, Facebook, etc., came out on top. But sometimes hype is warranted As ChatGPT usage declined this summer, some investors started to wonder if AI companies will fall into the Cisco camp. But AI is still very much in its infancy, and Nvidia could certainly live up to investors’ lofty expectations. After all, sometimes the market does guess right about new tech. Companies like Apple (peak PE: 343) and Amazon (peak PE: 2,169) got the market excited about their potential to change the way people lived — then they actually did it and paid their investors handsomely. So maybe Nvidia is more Apple than AOL? Nvidia’s dizzying valuation suggests that a lot of investors think so, and the company’s earnings announcement this week will give these investors a chance to anchor, and perhaps adjust, their expectations on actual data. If the company delivers on Q2 expectations, investors will certainly keep ignoring the AI naysayers. —Ben Mathis-Lilley OTHER VERY GOOD READS 🔮 Canada in the Year 2060 It’s going to be weird. Here’s how we can get through it | Maclean’s 🛍️ What Happens to All the Stuff We Return?* “Reverse logistics” has become a booming industry | The New Yorker 🧓 How to Save $1.7M for Retirement We did the math so you don’t have to. | Wealthsimple Magazine *Article is paywalled, which, yeah, is kind of annoying. But we think good journalism is worth paying for. THE WISDOM OF TWITTER We’re gonna go rogue and say bring back Sam the Record Man. THOUGHTS ON TODAY’S ISSUE? Love it Good So so This week’s newsletter contributors: Brennan Doherty (writer), Devin Gordon (writer), Stacey Woods (writer), Sarah Rieger (news writer), Ambrose Martos (fact checker), Ciara Rickard (copy editor), Nikki Holmes (copy editor), Sara Black McCulloch (fact checker), Mohini Tailor (senior LifeCycle specialist), Jared Sullivan (senior editor), Peter Martin (senior editor), Kat Angus (managing editor), and Devin Friedman (editor-in-chief). Contributors to this newsletter own stock in Google and Amazon. 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