Plus: stocks take another tumble. August 05, 2024 Sign Up | View online IN THIS ISSUE 8 min read 🏘️ Permitting problems 🫂 AI amigos 📈 Stock-market stages Is it just us, or is Meta’s Mark Zuckerberg trying really, really hard to seem cool these days? We explain below. | Mark Zuckerberg/Instagram THE WEEK IN MARKETS Stocks Fell Big. Again. Remember how for months and months we kept saying that we were waiting for a new narrative besides “line go up”? Well, be careful what you keep saying. One ugly week in the markets could be an outlier. Now we’ve had two in a row. The TSX, S&P 500, and Nasdaq finished last week down 3%, 2.5%, and 4%, respectively. Big Tech got hit particularly hard. No one is quite sure what’s going on. Could be Friday’s soft U.S. jobs report heightening recession fears. Could be the most volatile earnings season since 2009 (congrats, Meta! yikes, Intel!), which has left investors unsure whether the sky is falling or if everything’s A-OK. Or could be the so-called “Harris Correction” — the theory that Kamala’s growing election odds dimmed hopes for tax cuts. Now the good news: the markets are merely back to June levels, and those were all-time highs. Plus, over the last 15 years, intra-year pullbacks as high as 10% have been the norm — and history suggests panicking is the wrong reaction. SMART CHART WHAT HAPPENED LAST WEEK IMPORTANT Canada’s housing market broke the law of supply and demand — at least that’s what Kevin Carmichael, The Logic’s economics columnist, argues in a sharp new essay. Despite sky-high demand, developers are building fewer new units today than they were in 2022. And that, Carmichael notes, is not what you’d expect under capitalism. No, you’d normally expect money-eyed developers to fall over themselves to build. Carmichael largely blames red tape: it drives up construction costs and delays projects, which has made banks and big investors reluctant to finance new developments. He argues that, to spur construction, policymakers should make real estate a more attractive investment by doing things like speeding up permit timelines. Zuck is trying to convince us he’s cool. Old Zuck: sunscreen surfing memes. New Zuck: tuxedo surfing memes. Old Zuck: weird buzz-cut avatars. New Zuck: floppy hair and gold chains. What’s up with Zuck’s rebrand? Is it just a case of a rich guy being sort of eccentric? Maybe! Or is the image relaunch part of a more concerted strategy to help Zuck win over a younger crowd and normalize AI, which Meta has poured heaps of money into? Also maybe! Careful observers have noticed that Zuck’s recent social-media glow-up has featured lots of AI-generated imagery. Either way, AI is already paying off for Meta: it beat earnings expectations, with help from AI-enhanced ad targeting. INTERESTING Your kid’s future is riding on your neighbours. A provocative new study from Harvard economist Raj Chetty found that children in neighbourhoods with a high rate of employed parents earn more as adults than kids raised in low-employment communities, even if their own parents go through long stretches of being out of work. The implication is that a child’s success has less to do with immutable factors like race than with “social interactions.” Chetty’s conclusion? We should support policies that not only create jobs but also encourage interactions (through school, housing, etc.) between poor families and ones that are comparatively better off. Everybody sing along! AI’ll be there for you-ooo. If you believe tech founder Avi Schiffmann — the man behind last week’s most viral ad — your next BFF is a wearable AI necklace called Friend. The device “always has an opinion to share [via text message] about what’s going on around it,” Wired explained. Wearable tech has a lousy track record. But Schiffmann believes that past devices erred in focusing on productivity, not friendship. In a bold move, he reportedly spent US$1.8 million of his startup’s $2.5 million funding not on product development but on the domain friend.com. We’ll see if the investment pays off when the first 30,000 Friend devices (US$99) get shipped out early next year. —Abigail Covington & Srivindhya Kolluru FROM OUR SPONSOR THE FOMO INDEX by Stacey Woods IMPORTANT ⚽ Government withholding some Canada Soccer funds after spying scandal. Teams consider raising money with a car wash or drone sale. Source 🚘 Tesla recalls 1.8 million vehicles because the hood might open unexpectedly, blocking your view of all those inferior cars. Source 💇 Canadian households now worth over $1 million on average. Maybe more if dad gets that hair transplant. Source 👑 NBC breaks its $1.25 billion record for Olympics ad sales. Headless Marie Antoinette says she’s ready for 2028. Source CRASH & BURN TO THE MOON 🍔 McDonald’s global sales fall for the first time in three years. People can’t afford to splurge like it’s the pandemic. Source 🐝 Two-hundred thousand bees stolen in Quebec. Suspects considered swarmed and dangerous. Source 🚁 Ontario spending $134 million on five helicopters to combat car theft — or at least get a really cool view of it. Source 🍗 Ohio court rules that “boneless” chicken wings can contain bones. Also set to rule on whether Bloody Marys can contain blood. Source WHO CARES THIS WEEK ON THE PODCAST THE BIG IMPORTANT STORY EQUITY The Stock Market Moves in Cycles. Brace Yourself For months, there has been a debate in the financial world about something known as the market cycle. What’s that? Market cycles are broad, historical patterns that people have identified in stocks, corporate profits, and economic activity. And that pattern tends to go something like: a few years of good growth → a peak → a bust that rocks everything → rinse, repeat. The hard thing about cycles is that analysts, fund managers, and financial firms seldom agree on which phase markets are currently in, and that’s certainly true now in light of last week’s stock slip. Let’s dive into how cycles work, so you won’t be caught off guard by whatever might lie ahead. Why do people care about cycles? In every market cycle, stocks move from a low point, or bottom; rise a bunch; top out; and then, for one reason or another, fall sharply and hit another bottom. The latest complete cycle began when stocks bottomed out in March 2020 as COVID swept the globe and lasted until October 2022, when stocks, after rocketing up in 2021, hit another low amid fears that rising interest rates would hurt growth. We’re now somewhere in the next cycle. The part of cycles that worries investors is, as you could guess, the fall. That’s why when people ask “Where are we in the market cycle?” what they’re often really asking is “Are stocks approaching a peak? And are bad times coming?” What drives market cycles? Cycles have less to do with what’s happening in the economy right now than with what investors expect will happen. For instance, even if companies aren’t making much money during a recession, investors may begin piling back into stocks anyway because they expect the economy to recover and for businesses to make money in the future. And once investors start buying stocks, they often kick off a positive, self-reinforcing feedback loop between consumer spending, business investment, corporate profits, and stock performance. Good times beget good times. Expectations can also end a cycle, like when investors began off-loading stocks in January 2022, because they expected rising rates to hurt corporate profits, not because rates had actually done so yet. Cycles are emotional. Since 1945, cycles have typically lasted six or seven years, and each cycle has more or less followed the same arc, as strategist Peter Oppenheimer observed in his book The Long Good Buy: Analysing Cycles in Markets (which we drew on for the chart above). [1] Despair (new cycle): Investors, expecting a recession, dump their assets. [2] Hope (early cycle): Some investors begin buying stocks again, believing that corporate earnings will soon recover. If they’re right, they stand to make substantial returns. [3] Growth (mid cycle): Companies begin to deliver positive earnings, but oversized stock returns are usually harder to come by since stock prices have already risen from their recent lows and investors often revise down their future earnings expectations. [4] Optimism (late cycle): Jubilant investors pile into stocks, though companies’ earnings may no longer justify their high prices. The market will eventually correct when investors begin selling off overvalued assets. So where are we now in the current cycle, and what should you do about it? Much of the cycle debate centres on whether expectations for AI and tech are too rosy. The S&P 500, after all, is up a lofty 13% YTD, and that’s after a 6% slide since mid-July. Some investors hold, though, that huge profits, particularly in tech, more than justify this year’s stock gains. The tricky thing, now as ever, is that it’s almost impossible to know which stage the cycle is at in real time. (Narrative comes later!) Fortunately, history suggests long-term investors should do the same thing no matter what — and that’s to invest steadily, diversify, and not dump your holdings in a downturn if there is one. From 1942 to June 2024, the S&P 500 rose 149% during bull markets and fell only 32% during bear markets. And studies show that investors who panic-sell during drawdowns tend to delay reinvesting, causing them to miss out on big returns as stocks recover. Which is why it’s often best to sit tight, stick to your investing plan, and trust that bad times won’t last forever and that the cycle will keep cycling. —Ben Mathis-Lilley & Jared Sullivan OTHER VERY GOOD READS 🏚️ Should You Rent or Buy? Here’s a quick formula to see. | Wealthsimple Magazine 🕵️ China’s Spy Threat Is Growing But the West has struggled to keep up. | BBC 👶 The Movement Trying To Get People To Have More Babies The pronatalists, explained. | Vox POSTS OF WISDOM We havarti run through the other options: this cheese pun is as gouda it gets. THOUGHTS ON TODAY’S ISSUE? Love it Good So so This week’s newsletter contributors: Ben Mathis-Lilley (writer), Devin Gordon (writer), Stacey Woods (writer), Sarah Rieger (news writer), Ambrose Martos (fact checker), Ciara Rickard (copy editor), Clare Douglas (copy editor), Sara Black McCulloch (fact checker), Mohini Tailor (lifecycle marketing manager), 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 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. VIEW IN BROWSER PRIVACY POLICY UNSUBSCRIBE $100 Bonus: From July 29 to October 1, 2024 (“Promotion Period”), eligible Wealthsimple clients who set up their first recurring automated direct deposits in their Wealthsimple Cash account, totalling at least $2,000 per month for at least three months will receive a cash bonus of CAD$100. Eligible deposits for the first month must be received during the Promotion Period. Maximum 1 bonus per client. Other conditions apply. See here for details. ATM reimbursement: While Wealthsimple does not charge additional ATM fees, withdrawals may be subject to a fee charged by ATM providers. Wealthsimple will reimburse Cash clients an unlimited number of ATM fee reimbursements from a CAD withdrawal with qualifying merchant code (up to $5 each). Reimbursements will be made to the account linked to the Cash Card within 4 business days after the ATM transaction settles. Click here. 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. TLDR is not a research report and should not serve as the basis for making investment decisions. Wealthsimple Media Inc. does not endorse any third-party views referenced in this content. When you invest, your money is at risk and it is possible that you may lose some or all of your investment. Past performance is not a guarantee of future results. Historical returns, hypothetical returns, expected returns and images included in this content are for illustrative purposes only. Always research before investing. © 2024 Wealthsimple Media Inc.