Until we meme again. December 19, 2022 Made in Canada IN THIS ISSUE Welcome to TLDR’s super-special quarterly markets edition! This week, we’re unpacking, with cracker-jack analysis, all the ups and (many) downs of Q4* and 2022 in general. The TLDR team is taking next week off, so you won’t be hearing from us again until the new year. In the meantime, happy holidays! —The Editors *OK, the fourth quarter runs from October 1st to December 31st*, so it isn’t technically over yet, but the holidays are coming, so we thought, Why wait? Q4 REPORT CARD Oct. 1 – Dec. 16 S&P 500 +7.3% (-19.3% YTD) TSX +6.1% (-7.8% YTD) Nasdaq: +2.6% (-31.1% YTD) Biggest Canadian Gainer: Shopify +32.8% (-73% YTD)* Biggest Canadian Loser: Algonquin Power & Utilities -37.6% (-52% YTD)* Federal Bonds: +3.4% (-9.8% YTD) Commodities: +2% (+15.8% YTD)** Bitcoin: -13.3% (-63.6% YTD) Five Most-Traded Wealthsimple Stocks: $SQQQ, $SHOP, $TQQQ, $TSLA, $HNU*** *Universe: TSX 60 **Bloomberg Commodity Index ***Based on DIY Wealthsimple customer trades by notional value bought or sold. THE BIG IMPORTANT STORY #1 #TOTHEMOON A Farewell to FOMO By Felix Salmon Illustration by Vincent Kilbride A year ago, FOMO was everywhere. Wall Street traders feared they were missing out on crypto. Crypto diehards feared they didn’t own enough NFTs. And NFT collectors feared that, by loading up on monkey jpegs, they might miss their chance to ride Rivian to the moon. Those of us who sat out the frenzy could hardly blame anyone who got swept up in it. The S&P 500 recorded 70 closing highs last year, and 171 Canadian companies went public, raising a record $10.2 billion. A Bored Ape Yacht Club NFT sold for US$3.4 million. Then the calendar flipped to 2022, and the world changed. Russia invaded Ukraine. Inflation soared. Interest rates rose. The memestocks imploded. The vibes shifted. And, one by one, the pandemic-era highfliers fell to earth: Peloton, Netflix, Zoom, NFTs, cryptocurrencies. Even U.S. Treasury bonds, commonly considered the world’s safest asset, saw a record slump. As of October 1, global stocks and bonds had lost US$36 trillion, with a t, in value. (Assets have only slightly recovered since.) The remarkable thing is not so much that a bust followed the boom — no bull market lasts forever — but rather that the downturn hasn’t sparked a widespread calamity in Canada or in the U.S. Certainly there’s no sign of mass home foreclosures or failing banks, like we saw in 2008. Why not? For one, the average trader who swan-dived into the GameStop ($GME) frenzy last January was a 34.5-year-old male who earned a cushy US$86,000 a year. A Venn diagram of these to-the-mooners and the average crypto trader would almost be a circle. Tomayto, tomahto. These speculators were playing a massive multiplayer game with money as much as they were investing in the classical sense of the term. And they risked their money with their eyes open, since many had previously traded speculative stocks. They knew that they could suffer huge losses, and most $GME latecomers did. Some might have regretted the whole thing. Yet the fun many of these YOLO traders had more than made up for their dismal returns. It was for the lulz. It’s no shock, then, that, after a bloodbath of a year, Redditors and crypto bros, as a rule, don’t have their tails between their legs: they’re tweeting about Bitcoin and Ethereum almost as much as they ever have, and they’ve kept $GME up more than 2,000% from early 2020, despite the company having lost billions. Fortunately for the rest of us, the pain caused by the bursting speculative bubble has been narrowly circumscribed. Researchers have found no evidence of contagion in the stock market from the $GME mania; only one hedge fund, Melvin Capital, landed in real trouble. Similarly, FTX’s collapse has spread no obvious hurt into traditional finance, since most big banks (smartly, in retrospect) avoided the space. Zoom out to average investors — to us normies — who didn’t jump into the frenzy: few are thrilled by the declining markets, of course, but many remain cautiously optimistic. (Why else do we keep piling into stocks at any hint of cooling inflation?) The relatively rosy vibes at least partially owe to the fact that, while stocks have fallen, they haven’t fallen that much. This year’s losses leave the S&P 500 up 15% from February 2020 and the TSX 60 north 10% over the same period (with the latter down a mere 8% YTD). The 2022 drop was significant, to be sure, but the fact that it wasn’t worse is pretty impressive, given that the world is reeling from the worst global pandemic in a century and the outbreak of war in Europe and broad inflationary unrest. For a market decline to really sting, it needs to be accompanied by a recession, mass layoffs, and a sharp hit to earnings. We haven’t seen any of that yet. But there are legions of doomsayers (many pro investors among them) who suspect that we will soon. If they’re right, it’ll likely be because stubbornly high inflation necessitates more jumbo rate hikes. That, in turn, could accelerate job losses and force people who are out of work and cash-strapped to sell their stocks and other assets. Or it could just freak out people enough to sell. Either way, the pain would spread. To avoid such a scenario, the Federal Reserve and the Bank of Canada need to pull off a so-called soft landing — that is, avoid a recession while steadily pushing down inflation. (There’s some evidence that Wall Street thinks they might just succeed.) What if the central banks fail? So far, the end of the FOMO era has helped those of us who didn’t chase moonshots feel a tiny bit better about our comparatively small losses. If the doomsayers are right and the economy does tip into a recession, we may stop feeling so ahead of the game. But history suggests that the boring things that kept us from taking big risky bets last year — discipline, diversification, steadily investing over a long period — will again carry the day. Obligatory Inflation Story Pain Points Inflation is a global phenomenon, which means that supply snafus on the other side of the world are affecting prices in Canada. We’ve seen that most obviously with energy. But other, more discreet factors are pushing up the cost of food (+10% YoY), housing (which hit a 32-year high this year), and nearly everything else. Here are four problems far outside Canada that contributed to inflation this year. 🌾 Soy (U.S.) The U.S. produces a third of the world’s soy, but low water levels have tripled the cost of shipping it down the Mississippi River. Soybean prices are up 36% in Canada, and that’s driven up the price of vegetable oils and other groceries. ☕ Coffee (Brazil) Brazil, which produces a third of the world’s coffee beans, suffered two years of severe drought, which resulted in poor yields and helped to raise ground-coffee prices by 9.5% in Canada compared with 2021. 🚜 Potash (Belarus) To grow food, you need fertilizer, which means you need potash, a potassium-rich salt. The problem is that sanctions on Russia and Belarus, the world’s top two suppliers behind Canada, have sent prices soaring 154% this year, contributing to record-high food prices. 🏗️ Steel (China) Last year, China, the world’s top steel supplier, began cutting its exports owing to environmental concerns — right as housing construction boomed in Canada. The cost of ferrous metals, like steel, rose nearly 60% in 2021 and stayed high. FROM OUR SPONSOR The RESP deadline is days away 🚨 Contribute to your RESP before December 31 to get 2022 government grants (free money!) for your kids' education. And (if it's a Wealthsimple RRSP) your contribution will help make education more accessible for other Canadian families through our Foundation. Nice! Learn how to get started, and how to get all the free money you can before the year runs out. Learn more THE BIG IMPORTANT STORY #2 ASSETS The Story of the Fourth Quarter, in Three Stocks By Sarah Rieger Illustration by Vincent Kilbride A sampling of assets that illuminate different ways rising interest rates and growing recession fears have scrambled the economy. CRUSHED: 🏠 Zillow ($ZG) Let’s just say that seven jumbo interest-rate hikes haven’t exactly done great things for the Canadian housing market this year. In fact, the hikes led to a 10% drop in home prices and hurt real-estate-adjacent companies like Zillow. The online marketplace’s stock has sunk a nauseating 43% so far in 2022 as listings decreased. Zillow also shut down its home-flipper side hustle, Offers, after it got stuck with 7,000 homes and lost US$300 million in just a few months. RESILIENT: 👜 LVMH ($LVMUY) The luxury-fashion conglomerate Louis Vuitton Moët Hennessy, or LVMH — home to Dior, Sephora, etc. — is down -11% YTD, which is a solid showing this bruising year. Turns out, while we have been itemizing our grocery budgets, the rich, who are largely unfazed by rate hikes, have kept on forking out cash for designer handbags and other fancy-shmancy stuff. Last Tuesday, Bloomberg declared LVMH CEO Bernard Arnault the richest person on God’s green earth, a feat he achieved mostly because of Elon Musk’s and other tech oligarchs’ very bad financial year. ACTUALLY DOING JUST FINE, THANK YOU! 🥫 Loblaw ($L-T) Speaking of oligarchs: the stock price of Galen Weston Jr.’s grocery empire has climbed almost 20% this year, while its profits have done even better, growing 30% in Q3. Galen has pinky-promised that his company’s fat profit margin has nothing to do with “greedflation” and that it has instead raked in cash from the booming cough-and-cold-medicine market. Which, sure. Q4 CONTEST Last week, we asked for the most interesting, helpful, or surprising things readers learned about money this year. Scores of you responded, and, well, a lot of you said basically the same thing. But what you said was measured and smart! It boiled down to: Be boring. Stop following the trends. Diversify. And don’t get freaked out when the market tumbles. In fact, don’t even open your investing app. Nice job, Yousef, David, Gila, Travis, and everyone else who wrote in to remind us about being smart investors. READER FEEDBACK Some readers let us know that they were offended by this joke from last week’s FOMO index: “Subsidized daycare means more women than ever in the workforce wishing they were on vacation.” As always, we appreciate the feedback. Our FOMO writer, Stacey Woods, wanted to respond: I went on a little listening tour (Slacking with two co-workers is technically a listening tour) and found out that, along with not being uproariously funny, this joke was hurtful to many of my sisters out there. I’m so sorry! I’m still not sure how it went so wrong, but apparently it came across like I was saying women can’t handle going to work or that being at home with your kids is like a vacation. Neither could be further from the truth! This wasn’t a dig at women but at working! — Stacey Woods SHARE TLDR WITH YOUR FRIENDS 🤝 Put this link in your group chats, your Slack threads, tattoo it on your back — whatever works for you! THOUGHTS ON TODAY’S ISSUE? Love it Good So so This week’s newsletter contributors: Sarah Rieger (news writer), Ambrose Martos (fact checker), Ciara Rickard (copy editor), Sara Black McCulloch (fact checker), Jared Sullivan (senior editor), Kat Angus (managing editor), and Devin Friedman (editor-in-chief). Wealthsimple Media Inc. 80 Spadina Ave Suite 400 Toronto, ON, M5V 2J4 Replies to this email address are not monitored. Have questions? Visit our Help Centre or submit a request to our Client Support team. PRIVACY POLICY UNSUBSCRIBE TLDR is offered by Wealthsimple Media Inc. and is for informational purposes only. Any views expressed are those of the individual author and/or of Wealthsimple Media Inc., not of Wealthsimple Financial Corp or any of its other subsidiaries or affiliates. The content in TLDR is not investment advice, a recommendation to buy or sell assets or securities, nor any other kind of professional advice. 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