A present for your portfolio, from Silicon Valley December 18, 2023 Sign Up | View Online IN THIS ISSUE 8 min read Welcome to TLDRQ4, the definitive guide to what happened in the last three months and why you should care. Come for the recap, stay for the Vibe Check (see below). We’ll be off for the holidays until January 8th. Until then, thanks for reading! —The Editors Q4 IN NUMBERS Oct. 1 – Dec. 15. TSX: +5.7% (+9.4% YTD) S&P 500: +10.4% (+24.9% YTD) The TSX’s best performance: +142% YTD ($CLS-T) BoC rate hikes in 2023: 3 (of 10 total since 01/’22) BoC rate cuts expected in ’24*: 5 Average Canadian home price today: $646K Average forecasted home price in ’24: $691K Canadians who doubt they’ll ever own a home: 66% *Per Bloomberg data. Other sources: CREA, Ipsos polling. Total returns shown for the TSX and S&P 500. THE BIG IMPORTANT STORY THE YEAR IN REVIEW Money 2023: The Year of ‘Wow, That Wasn’t So Bad After All’ By Ben Mathis-Lilley The investing world expected a brutal 2023. Instead, stocks soared and the economy is (probably) headed toward a soft landing, which underscores an important economic truth: predictions are often wrong. | Wealthsimple If this year in money could be summarized in a sentence, it would be: That went really well, all things considered! Twelve months ago, economists and market prognosticators almost universally believed that a recession was not just imminent but necessary — the idea being that the only thing that could rein in inflation was an economic downturn courtesy of painful interest-rate hikes. This gloomy view was validated by periodic discouraging news. In March, Silicon Valley Bank collapsed and the stock market plunged — a roller-coaster drop that made everyone think, Is all the pain about to start? Then, over the summer, China’s COVID reopening sputtered. But a five-alarm economic crisis never materialized, or at least it hasn’t yet. Canada’s inflation rate fell from 5.9% in January to 3.1% in October. Unemployment remains fairly low, at 5.78%, despite 10 (!) interest-rate hikes since 2022. Consumer spending is at an all-time high. And stocks have rallied as more and more investors have come to see sunshine and rainbows in the future, based on the assumption that central bankers will cut rates next year. In other words, it looks like we’re getting a soft landing. That leads us to one of the year’s major takeaways: don’t put too much faith in forecasters. But 2023 had a few more big lessons for us, as well. Here are three. [1] The COVID cycle has been loooong — and it’s still going. The pandemic long ago stopped disrupting most people’s daily lives. But four full years after the coronavirus swept the world, COVID’s ripple effects are still being felt throughout the economy. Think about it: In 2020, the pandemic caused the most severe economic contraction since the Great Depression. Unemployment spiked, and the global supply chain fell apart, causing all sorts of shortages. Governments, in response, handed out money to stimulate the economy. And, boy, it worked. In 2021, the economy took off like one of those water jetpack things as the freshly vaccinated masses started trying to spend cash. The problem was that all the sudden demand — coupled with lingering supply-chain chaos and a spike in energy prices resulting from Russia’s invasion of Ukraine in early 2022 — sent inflation to its highest rate since 1982. And because of that, central banks raced to raise rates to cool demand. And that seemed certain to crush consumer spending and drag the economy into a recession. But — surprise! — spending stayed strong, supply chains got fixed, energy prices fell, and inflation cooled unexpectedly quick. And this whole chain of events stemmed from the COVID shock. The part that really surprised investors was that businesses were able to quickly meet all the pent-up demand unleashed by the post-lockdown recovery, and prices mostly stabilized as that happened. As for consumers, the ride wasn’t comfortable. Everything costs more than it did before the pandemic, and no one is used to it yet. And, unfortunately, it could take years for wages to catch up across the board and ease the discomfort. [2] It’s really, really hard to fix housing. Affordable housing has been a Big Issue in Canada for a long time, but the pandemic turned the problem into a fiasco for prospective buyers. Home prices have soared by at least 25% since 2019. The solution is fairly clear: Canada needs to build more houses — as in 3.5 million additional units by 2030. So why can’t we just do that? Well, we’ve learned that it’s not easy to get projects going. Interest rates bear some blame. Developers need to take out loans to build, but borrowing is expensive now, so they’re not rushing to do it, hence they’re building fewer new homes today than they were two years ago. But a more fundamental problem are restrictive zoning rules that prevent or limit building high-density housing. A construction labour shortage is complicating the situation. All these factors recently led the federal government to revive a war-time program that will allow developers to build pre-approved home designs quickly — a desperate measure for a desperate time. [3] The end was not nigh for tech stocks. We published an essay in April about traders — namely Steve Eisman, of The Big Short fame — who speculated that tech might soon lose its dominant place atop the stock market. Eisman’s argument went something like: tech companies live off borrowed money to grow and develop moonshot products that could generate big profits far in the future. And in the zero-rate, pre-pandemic era, investors were happy to wait for said profits, because tech companies were growing like crazy and seemed sure to deliver. But, according to Eisman and others, in a world of higher rates, investors would favour companies that are highly profitable right now, because the rising cost of borrowing would kneecap tech companies dependent on cheap capital to grow. All of this seemed plausible; none of it happened. As a chart below shows, seven big U.S. tech companies carried the stock market by improbably rising almost 75% YTD. Why? Profits boomed, for one. But investors also became captivated by artificial intelligence and felt sure it would be a boon for the tech giants developing it. A gold rush ensued (helped along by rate-cut optimism). Shares in Microsoft — widely seen as an AI leader — have risen by 55% YTD. AI-chip designer Nvidia raked in US$18.1 billion in Q3. Its stock sits +237% YTD. Who knows whether the so-called Magnificent Seven will live up to investors’ high expectations. But all the speculation about tech losing its stock-market crown now seems premature at best and flat-out wrong at worst. 2024: The Too-Good-To-Be-True Year? What’s next? Goldman Sachs and other fancy firms have rosy views, believing that inflation will keep falling, central bankers will cut rates (perhaps as early as the spring), and the economy will chug along nicely. But let’s not forget a major lesson we mentioned up top: predictions are often wrong. Forecasters were wrong about this year being terrible, and they could be wrong that next year will be all cookies and ice cream. Their expectations are super high, and potential curveballs abound. Inflation could rise from the (almost) dead, say. Or consumer demand might slow. Or China could act on its threat to invade Taiwan and disrupt the world’s semiconductor supply, to say nothing of the human toll. Then there’s Russia’s war against Ukraine, Israel’s war in Gaza, and the possible reelection of Donald Trump. Let’s cross our fingers for the cookies-and-ice-cream scenario. SHARE TLDR WITH YOUR FRIENDS 🐷 Put this link in your group chats, your Slack threads, tattoo it on your back — whatever works for you! FROM ON SPONSOR THIS YEAR, IN THREE CHARTS Seven U.S. tech stocks carried the S&P 500 this year, returning almost 75%, while the other 493 companies that comprise the index only gained about 9%. The TSX rallied too, but a lot less, given that it’s light on tech and heavy on industries that aren’t doing so hot, like oil. The average Canadian family is spending more than half — half! — their income on housing. Supply is obviously to blame, but interest rates also played a role in making housing increasingly less affordable. And just in time for Christmas… Chocolatiers have been hiking prices this year, so don’t be surprised if holiday gifting is a little more costly. One reason: heavy rain in Côte d’Ivoire and Ghana, which produce 60% of the world’s cocoa beans, triggered outbreaks of a fungal infection that turns cocoa pods into black mush. Owing to poor harvests, cocoa prices are now the highest they’ve been in nearly 50 years. —Sarah Rieger ✨ VIBE CHECK ✨ An unscientific, mostly feels-based assessment of what’s hot and what’s, well, less hot. By Stacey Woods 🔥 🥶 ✉️ A little more in your pay envelope More companies are trying to keep employees by giving them what they all really want for Christmas: bigger bonuses. 🥳 A little less yuletide boozing on the boss’s dime. Offices are scaling back holiday parties, so you’ll have to use your bonus to rent your own chocolate fountain. 📅 Getting a Save the Date for your layoff Bosses are giving pink-slipped employees enough notice to find new jobs and/or steal more pens before their last day. 🪓 Getting the axe from the top bunk If the two brothers fighting for control of investment firm Aimia don’t stop firing and suing each other, it’s going to be an awkward Christmas. 🛝 Taking slides instead of stairs There’s a company trying to lure employees back to the office with a slide, because apparently the stairs and elevators aren’t fun enough. 🪑 Taking away your employee’s chair Some companies still won’t let workers sit down, because if you’ve got time to lean, you’ve got time to know how little they care about you. 📺 Blackstone’s Cringe New ‘Eras’ Video The folks at the alternative-asset giant will make you wish you were watching Kendall Roy’s rap. 🎸 Signature Bank’s Cringe Folk Anthem The bank went under this year, but we hope some of these people are now touring with Mumford & Sons. TLDR PODCAST Want to know why you’ve probably never heard of some of Netflix’s most popular shows, or why suddenly Dollarama is the hottest place to buy groceries (and not just those weirdly good plantain chips)? Listen to this week’s TLDR podcast, out tomorrow, on Apple Podcasts, Spotify, Google Podcasts, etc. THOUGHTS ON TODAY’S ISSUE? Love it Good So so This week’s newsletter contributors: Ben Mathis-Lilley (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 marketing specialist), Will Cuthbert (designer), Matthew Karasz (markets editor) Jared Sullivan (senior editor), Peter Martin (senior editor), Kat Angus (managing editor), and Devin Friedman (editor-in-chief). Disclosures: Contributors to this newsletter own shares in Google and Microsoft. 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