#174 - 10 Biggest Innovations In 2022 and Navigating The Canadian Economy
Last Fed Meeting Until February 23’
Navigating the Canadian Economy in 23’
Top 10 Innovations of 2022
What to get your husband for Christmas in this year
Recommendations and Predictions
If you aren’t in the Reformed Millennials Facebook Group join us for daily updates, discussions, and deep dives into the investable trends Millennials should be paying attention to.
👉 For specific investment questions or advice contact Joel @ Gold Investment Management.
US equities retreated on Friday as investors negotiate monetary policy tightening. Large caps lagged small caps: S&P 500 (-1.11%) vs. Russell 2000 (-0.63%).
Real estate (-2.96%) and consumer discretionary (-1.74%) weighed on the broader market indices, while communication services (-0.11%) and materials (-0.41%) outperformed. American Express (-2.61%) and Nike (-2.36%) weighed on the Dow (-0.85%); Caterpillar (-0.11%) and Dow Inc (+0.55%) were the index's best performers.
The Nasdaq lost 0.97%, while tech dropped to 22.62. The "FAAMG" stocks mostly fell: Meta (+2.82%), Amazon (-0.67%), Apple (-1.46%), Microsoft (-1.73%), Alphabet (-0.37%).
The VIX edged down 0.92% to 22.63. The 30-year and 10-year Treasury yields ended at 3.543% and 3.742% respectively, while the 2-year yield finished at 4.182%.
US equities are having a tough December, but not because of rates (lower since end of November) or global risk-off sentiment (non-US currencies stronger, international stocks holding in). Recession concerns are hitting investor confidence, and that in turn is hurting valuations across the board
BBB/CCC US corporate bond spreads are at/near multi-month lows, a remarkable vote of confidence considering the marginal nature of these credits.
Last week’s US equity market weakness was not only due to Fed monetary policy worries, but also the fact that Wall Street analysts were cutting their earnings forecasts for S&P 500 companies by the largest amount in a month. The data, courtesy of FactSet’s Earnings Insight report (link below):
Analysts reduced their Q4 2022 S&P 500 corporate earnings estimates by 0.5 percent last week, to $54.24/share. This was their largest reduction since the week of November 11th, when they cut their Q4 numbers by 1.2 percent.
Q1 2023 estimates came down by 0.4 percent last week, to $54.60/share, the largest cut since November 11th’s 0.4 pct reduction.
Also worth noting: Q4 2022 and Q1 2023 estimates of $54.24/share and $54.60/share are below the last 2 quarters actuals of $56.69/share (Q2 2022) and $55.65/share (Q3 2022).
For all of 2023, analysts’ estimates now stand at $231.59/share. That is down 0.3 percent from the prior week, the largest reduction since November 11th’s 0.4 percent cut.
However, Wall Street analysts do still expect the S&P 500 to earn 4.9 percent more in 2023 ($231.59/share) than 2022 ($220.87/share). Much of this improvement is loaded into the second half of next year, when the Street is expecting quarterly earnings to hit fresh records of $59.03/share in Q3 and $59.82/share in Q4. Those would be 4.1/5.5 percent better than the prior record of $56.69/share in Q2 2022.
As much as analysts have reset their Q4/Q1 expectations down to more realistic levels, there isn’t much difference between what they expect over the next 2 quarters and recent S&P earnings power. The average of their Q4/Q1 estimates is $54.42/share, and the Q4 2021 – Q3 2022 “actuals” quarterly average is $55.45/share. The difference there is just 1.9 percent and far from the typical 20 percent decline in S&P profits during a recession.
The Street’s back half 2023 estimates assume a resumption of growth in the latter part of next year, an idea that is out of step with the market’s concerns about an upcoming recession. While the S&P 500 trades for 16.6x the consensus estimate of $231.59/share, that doesn’t make it “cheap”. Rather, that multiple is below the 5-year average of 18.5x because investors are rightly concerned that analysts continue to overestimate 2023 earnings power.
💸Reformed Millennials - Post of The Week
The global economy will continue to be swayed by geopolitics and COVID aftereffects in 2023—especially as advanced economies fight inflation and China looks to exit its zero-COVID policy. The U.S., China, and the European Union—representing half of global GDP—are already headed for recession or slow growth in 2023.There may be darker clouds ahead. The most consequential monetary tightening cycle in a generation is coinciding with the most significant fracture in international relations. At the same time, new economic paradigms appear to be emerging around labour markets, interest rates, emissions, trade, and national defence.The year 2023 will be choppy, and could see global reverberations from distress in highly-indebted economic sectors, volatile commodity prices, central bank policy, geopolitical maneuvering, and heightened economic competition even between friendly countries.
How Canada will be influenced by these global factors as it manages its own set of challenges and opportunities in the new year:
The Bank of Canada’s most challenging task lies ahead in determining when to pivot to loosen rates. The drift upwards in inflation expectations, high household indebtedness, and tight labour markets make the decision more difficult than usual.
Highly-indebted Canadians and sky-high housing markets will be further tested in 2023 with high rates and slowing growth. Spending and house prices will fall further and delinquencies will rise. But, it’s a rare, more significant negative income shock that could lead to an ugly outcome.
Climate investment in Canada could be a bright spot, as geopolitics drives interest in clean energy, and the federal government responds to US’s cleantech incentives. Still, it will not be enough to keep climate spending on target as the current environment disadvantages riskier cleantech.
With recent policy changes driving a huge boost to permanent resident flows, Canada is testing the limits of its ability to attract and integrate new Canadians, at least for now. Doubling down on skills development for the domestic and immigrant workforce is the next frontier in Canada’s talent strategy.
Thought Provoking Predictions In Tech for 2023
Below is a list of some thought-provoking tech predictions for 2023.
#1: The Verge put together a slew of tech predictions for 2023. Here’s what stood out:
“The Web3 vision fades into the rear view. With the events of 2022 having made pro-[virtual currency] partisans look like fools, and the threat of a recession making venture capitalists more cautious in the New Year, expect 2023 to carry lots of [digital asset] startups to their graves.”
“The use of ChatGPT in education will spark a national conversation about AI… this conversation will massively accelerate in 2023, as the technology spreads by word of mouth among kids home from school over the winter break. By spring break, we will have seen controversies related to the use of AI in education around the country, and by year’s end I wouldn’t be surprised if OpenAI had been dragged in front of Congress to talk about it.”
“The media will begin its divorce from Twitter…. Alternative platforms like Mastodon, while smaller and less intuitive to use, offer a safe haven to more and more people — particularly journalists — looking for off-ramps.”
#2: Forbes collected some forecasts from industry experts. Here they are:
“ESG regulations, together with people’s demands for a high standard of living, will drive property technology developments, as well as health, safety and security tech, to new levels. - Spiros Liolis, Micro Focus”
““The metaverse” is something of a catchall term used by futurists to describe the “next level” of the internet. With this emerging technique, we can interact with brands and fellow consumers through fully immersive technology, including 3D environments and virtual reality. We also might use avatars of ourselves to describe our products and services. - Cristian Randieri, Intellisystem Technologies”
“2023 will bring the rise of Web3 as a utility, not a gimmick. As more industries and businesses identify and understand the use cases for this new wave of technology—from tokenization for customer engagement (for example, digital collections and loyalty programs) to future-proofing payment platforms for digital assets, Web3-related technology will become part of many companies’ core solutions. - Kevin Lehtiniitty, Fortress Web3 Technologies”
#3: Amazon CTO Dr. Werner Vogels’ 2023 tech predictions:
“Like music and video, sports will become data streams that we can analyze. The insights that these will unlock in the coming years will transform the entire sports industry and redefine what it means to play—and experience—every game.”
“Spatial computing. Simulation. Digital twins. These technologies have been slowly maturing for years, but the everyday impact has been limited. This is quickly changing, and in 2023, the cloud will make these technologies more accessible, in turn enabling a new class of use cases that will be unbound by physical constraints.”
“Energy-storing surface materials. Decentralized grids. Smart consumption technologies. In 2023, we will see rapid development on a global scale that improves the way we produce, store, and consume energy.”
“In 2023, adoption of technologies such as computer vision and deep learning will propel the supply chain forward. Driverless fleets, autonomous warehouse management, and simulations are just a few of the optimizations that will lead to a new era in smart logistics and global supply chain.”
“Use of purpose-built chips will rapidly increase in 2023. As a result, the pace of innovation will accelerate as workloads take advantage of hardware optimizations that maximize performance, while lowering energy consumption and reducing costs.”
#4: CNBC’s feedback from media executives about next year:
“Netflix will merge with another company. This one was actually mentioned twice — one executive predicted Netflix would merge with Paramount Global. The other guessed Disney, as Iger’s signature move upon returning to CEO.”
“The cost of sports rights will peak. Live sports rights have been the lifeblood of the legacy pay TV industry for decades… But media companies are now focused on building their streaming businesses as replacements for traditional pay TV... Limited audiences, combined with a legacy media industry intent on focusing on profits and cost cutting, could end the trend of live sports commanding big rights increases.”
“Apple will ban TikTok from the App Store. Sen. Marco Rubio, R-Fla., introduced bipartisan legislation last week to ban TikTok from operating in the United States. The Senate also voted unanimously to ban TikTok on government phones and devices.”
#5: Gartner’s tech predictions:
“Through 2027, fully virtual workspaces will account for 30% of the investment growth by enterprises in metaverse technologies and will “reimagine” the office experience.”
“By 2027, social media platform models will shift from “customer as product” to “platform as customer” of decentralized identity, sold through data markets.”
“By 2025, without sustainable AI practices, AI will consume more energy than the human workforce, significantly offsetting carbon-zero gains.”
🎙Podcast & YouTube Recommendations🎙
Lifespan with Dr. David Sinclair - 7 episodes around the science and progress we’ve made in longevity medicine.
Plain English with Derek Thompson - Chat GPT, Obesity Drugs, Exoplanet Images and Medical Miracles
🔮Best Links of The Week🔮
"Salesforce co-CEO Marc Benioff told employees in a Slack message on Friday that the company’s newest hires aren’t being productive enough, and he asked for feedback as to why that’s the case. “Are we not building tribal knowledge with new employees without an office culture?” he asked in a message viewed by CNBC. He said he was “asking for a friend,” a phrase people often use on the internet to humorously reveal their curiosity about a topic. The message included an emoji showing a smiling face with a halo hovering over it, suggesting innocence." Source: CNBC
"[The virus] is spreading rapidly through China’s biggest cities, leading to widespread medicine shortages and exposing Beijing’s lack of preparation after authorities reversed strict pandemic controls. Residents of Shanghai, Shenzhen and other cities reported pharmacies have sold out of fever medicine and [virus] tests, while social media images contrast long queues outside [virus] clinics with otherwise empty streets." Source: FT
"Rising borrowing costs have dramatically increased the cost of buying a home this year, reviving interest in mortgage products like temporary buydowns that fell out of favor after the 2008 financial crisis. Temporary buydowns offer steep but short-term savings on mortgage rates. Borrowers get a much lower rate in the loan’s first year that gradually increases until it resets to a rate in line with market conditions at the time the loan was made. They differ from standard buydowns, in which buyers pay an upfront fee to permanently lower the loan’s rate. And unlike adjustable-rate mortgages, the loans reset to a fixed rate." Source: WSJ
Capital Allocation: Results, Analysis, and Assessment (Article | 75 mins)
Michael Mauboussin and Dan Callahan release their most comprehensive research ever on capital allocation. The references alone stretch over 15 pages. - Source: Morgan Stanley
Sea Change (Investment Memo | 24 mins)
Howard Marks tells us why it really is different this time. The 40-year fixed income bull run is over and it has far reaching consequences for investors in all asset classes. - Source: Oaktree Memo