Sorry, tech: markets are overdue for a shakeup. April 3, 2023 Sign up | Made in Canada IN THIS ISSUE Welcome to TLDR’s super-special quarterly markets edition! This week, we’re unpacking, with whip-smart analysis, the ups (and there were a lot, actually!) and downs of Q1 2023. — The Editors Q1 REPORT CARD Jan. 1 — Mar. 31 S&P 500 +7% TSX +3.7% Nasdaq: +16.7% Bitcoin: +71.3% (relative to USD) Biggest Canadian Gainer: Shopify +37.8%* Biggest Canadian Loser: Tourmaline Oil Corp -14.7%* Winningest Sector: Information Technology +27.6%* Five Most-Traded Wealthsimple Stocks: $SQQQ, $SHOP, $TQQQ, $TSLA, $HNU** *Universe: TSX 60 **Based on DIY Wealthsimple customer trades by notional value bought or sold. THE BIG IMPORTANT STORY #1 TRADING End Times for Tech Stocks? By Philip Grant OK, OK: tech stocks aren’t dying. But there’s a case to be made that rising interest rates could end their decade-plus-long dominance, which has everyone wondering: what comes next? | Illustration by Wealthsimple Over the past three months, tech stocks have mounted a massive turnaround. After shedding a third of its value last year, the tech-heavy Nasdaq is up 17% since January 1. Which might lead you to think that the story of the first quarter is that tech is once again triumphant. Maybe! But legendary investor Steve Eisman, of The Big Short fame, sees a different narrative; he believes a brand-new financial era is on the horizon. “Sometimes [paradigms] change violently,” he told Bloomberg recently, “and sometimes those paradigms change over time because people don’t give up their paradigms easily. And I think we’re going through a period possibly like that again.” The paradigm Eisman was referring to is the one that began after the 2008 financial crisis, when central banks cut interest rates to zero and kept them there, kicking off the frothy, free-money era that helped tech stocks — $AAPL, $GOOGL, $META, etc. — lead the market for more than a decade. Now investors like Eisman hold that higher borrowing costs could end that era. And he might have a point. Markets Are Overdue for a Shakeup There tends to be a major financial shift about once a decade as market dynamics change. In the ’70s, it was inflation that caused an upheaval. In the ’80s, rate hikes and deflation. In the ’90s, a small recession followed by rate cuts. These shifts have always upended whichever companies dominate the stock market. (See the chart below.) Among the ten most valuable companies in the world by market cap in 2000, a grand total of two — Walmart and Microsoft — remained in that rarified air 10 years later. And only Microsoft remained in the top ten from 2010 to 2020. The frothy era that’s perhaps behind us now was driven by a leap-forward in tech (e.g., the iPhone) and by historically low interest rates. And these rates gave investors little reason to keep cash in the bank, which drove money into higher-risk, higher-growth bets, like tech. Last year’s rate hikes changed this dynamic and triggered the tech-stock meltdown. Though the sector has rallied, Eisman argues that if interest rates stay high, as policymakers have promised they will, the era of tech supremacy is likely over, because investors will begin to favour companies that spit out a lot of cash now rather than ones, like tech firms, that promise windfalls far in the future. So What’s Next? It’s hard, if not impossible, to accurately predict which assets will perform well after a paradigm shift. If we assume Eisman is right about tech stocks fading, one candidate might be commodities, which did well during the high-inflation ’70s. Another contender: consumer staples (food, alcohol, etc.), a perennial safe haven. Or the shift could be geographic. American stocks command 60% of the value of all stocks globally, and no surprise: U.S. stocks surged 400% over the past 15 years. But replicating such a performance would be an extremely tall order. American stocks are currently near their most expensive levels, relative to earnings, in history. But it isn’t clear which country or countries, if any, might usurp the U.S. Why Timing Is Tough The other problem with paradigm shifts is timing. Does the fact that the Nasdaq has surged in 2023 mean Eisman is wrong about tech stocks, or just early? It’s hard to know! Central bankers could cut rates if the economy teeters, which would help tech stocks retain their #1 spot and make 2022 just a blip in their continued dominance. On the other hand, regime changes take time. As Eisman pointed out to Bloomberg, after the 2008 crisis, bank stocks soared in 2009 and 2010 before falling again; they haven’t led the market since. Something similar could be happening now: the tech party is over and the lights are on, but investors, eyes-closed, just want to keep dancing, damn it. But they can’t keep it up forever, at least not if rates stay high. Complicating the timing issue further, most market shifts play out fairly slowly — and much more slowly than the one we endured during Covid. It took only a year and nine months to hit the top of the work-from-home bull market after the March 2020 crash. This slower cycle means we might not know which companies will lead the market for some time. What is clear is that the investors who succeed will, as ever, be the ones who can adapt. Steve Eisman got rich betting against the U.S. housing market, but he told Bloomberg he’s not making that same trade again. The paradigm has changed. ♦ Philip Grant is the associate publisher of Grant’s Interest Rate Observer, a financial newsletter that was one of the first publications to warn about the 2008 financial crisis. He writes the very-fine Almost Daily Grant’s newsletter. 🏅 QUESTIONABLE ACCOMPLISHMENTS 🏅 🙄 Best Fair-Weather Libertarian: David Sacks, the Don’t Tread on Me VC and PayPal co-founder who begged the Fed to save Silicon Valley Bank, where he (presumably) had money, or at least the companies he invested in did. 🕵️ Best Shady Canadian Private Equity Firm: Pornhub purchaser Ethical Capital Partners. The company won’t disclose which executives are in charge because of the “stigma.” We didn’t know you could use incognito mode on your whole C-suite. 🐐 Best Scapegoater: WSJ opinion columnist Andy Kessler, who boldly posited that perhaps Silicon Valley Bank’s collapse owed less to reckless behaviour and poor management than to the bank having too many ladyfolks and minorities on its board. 🏠 Best Tiny Nod to Fixing the Housing Crisis: The 2023 Budget, which asks banks to consider giving homeowners a break if they’re feeling mortgage stress and offers a new savings account for prospective buyers. Which, cool. But that’s little relief for the 34% of Canadians who must suffer this rental-market hellscape. —Jared Sullivan and Sarah Rieger ✨ VIBE CHECK ✨ An unscientific, mostly feels-based assessment of what’s hot and what’s, well, less hot. By Sarah Rieger and Stacey Woods 🔥 🥶 ⏰ The 5-to-9 lifestyle Bounding out of bed at 5 instead of just lying there trembling like usual. 📱 Day in the Life Videos Filming your office snack cabinet isn’t as exciting as you pretend it is. 🏗️ Building factories in Mexico Turns out, shipping is easier without ships. 🛢️ Building pipelines in Canada They’re expensive and no one appreciates them. 🥡 Clutter Influencers are coming clean about how dirty they really are. Long live anti-Instagrammability. 🧘 Minimalism Because you threw out everything that didn’t spark joy and now there’s nothing left. 💻 Focusmates Strangers working remotely together because they miss having coworkers to quietly resent. 💑 Work spouses Because one sexless marriage should be enough. 🪓 Outlast A rule-free survival show where contestants play dirty for cash, just as nature intended. 🙈 Love is Blind We’ve answered the question – love isn’t blind! It’s mostly just cringe. 🏦 Deposit insurance A possible increase in protection limits is looking hot this season. 😌 Panic without cause Let’s all take a deep breath before a deepfake causes the next bank run. THE BIG IMPORTANT STORY #2 EQUITY The Story of Q1, Told by Four Companies By Sarah Rieger The big news in Q1 was that stocks shot up. But that’s not the whole story. Here are four stocks that tell the prevailing narratives of their sectors last quarter. | Illustration by Wealthsimple 🧠 Microsoft ($MSFT) Microsoft was long considered a relatively moribund player in tech. Until now. Over the past four years, Microsoft poured billions into machine-learning startup OpenAI, a bet that paid off when OpenAI’s DALL-E and ChatGPT ignited an AI-mania earlier this year. Now, Microsoft’s once-meh search engine, Bing, is running on OpenAI tech, as is its cloud-computing platform, Azure — meaning they’re now products people actually want to use. Microsoft stock is up 20% year-to-date, and Microsoft has given investors more to be excited about: On March 16, it announced Clippy 2.0. And by that we mean a new AI Copilot for its Office apps, which will help with tasks like making Excel pivot tables. 🚌 NFI Group ($NFI) Everybody wants an electric vehicle. Which would be great for EV makers if they could actually keep up with demand. Winnipeg’s New Flyer, North America’s largest EV bus maker, has orders for thousands of buses, thanks to the U.S. covering 80% of the cost of one of its US$1.1-million buses for any U.S. city that wants one. But New Flyer hasn’t been able to keep up with demand, thanks to parts shortages. That’s resulted in a $230-million net loss and 2,000 job cuts. Parent company NFI Group’s stock is down 15% YTD, while the EV industry is broadly up 10% YTD. Combustion vehicle sales likely peaked in 2017, according to Bloomberg, but it might be a long time before the wheels of the green transition really start moving. 🛞 Canadian Tire ($CTC.A) The Bank of Canada would very much like you to help drive down inflation by not spending money. Unfortunately for the BoC, Canadian Tire has a real shut-up-and-take-my-money effect on Canadians. The retailer’s stock is up 20% YTD, owing in part to strong Q4 revenue of $5 billion, whereas consumer-discretionary stocks (Aritzia, Dollarama, etc.) are broadly flat YTD. Canadian Tire is riding extra high in part because its products, like home upgrades or car stuff, are easy to justify as quasi-necessities. The company also recently introduced a fee-based subscription tier, likely looking to capitalize on its position as Canada’s most-respected retailer. Which, no surprise. 💰 TD Bank ($TD.TO) U.S. bank stocks took a Pay-Per-View-style beating in March, after a series of bank failures. The stock of troubled First Republic Bank, which needed a US$30 billion emergency lifeline, tanked 90% (!) in mere days. Even too-big-to-fail Bank of America slid more than 20%, mostly just because. Canadian banks skated through just fine in comparison, thanks in part to the sweet, sweet stability that comes from having an oligopoly. The stock of TD, the Canadian bank with the largest U.S. footprint, is down only 7% YTD, and it rebounded 4% over the last week. The bank recently reported a 17% increase in revenue for Q1. A pretty, pretty good performance as far as mini-banking crises go. 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: Stacey Woods (writer), Sarah Rieger (news writer), Ambrose Martos (fact checker), Sara Black McCulloch (fact checker), Jared Sullivan (senior editor), Kat Angus (managing editor), and Devin Friedman (editor-in-chief). Contributors to this newsletter own stock in Microsoft and Google. 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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