Quarterly Market Commentary

as of December 31, 2023


What's happened since the last report?

The following commentary represents the opinions and analysis of Doug Nelson, President, Portfolio Manager, Nelson Portfolio Management Corp. as at January 14, 2019.  Market and index returns noted below are based on the price changes for each quoted item for the period ending December 31, 2018.  Market Statistics:  Source: https://YCharts.com.

  • The Toronto Stock Exchange Composite Index declined by approximately -11.1% from October 1 through to December 31, 2018. The bulk of this decline was generated by the large decline in energy (-29.6%) and financials (-12%).

In the June commentary I provided to you the following chart showing the market performance from July 1, 2017 through to June 30th, 2018.

Table 1: S&P / TSX Composite Index from July 1, 2017 through June 30, 2018.   Source:  YCharts.

Let’s now look at this same chart, but let’s extend it out an additional 6 months to include the July 1, 2018 to December 31, 2018 period of time.  The yellow shaded area in Table 2 represents the area illustrated in Table 1.

Table 2 shows us that the Toronto Stock Exchange generated a sideways return from July 1 to September 30th, and that most of the market decline has occurred in the months of October (-6.7%) and December


Table 2 also shows us that since January 1, 2019 the Toronto Stock Exchange Composite Index has gained in value by 4.5% (from 14,322 on the index to 14,975).

In short, we continue to see considerable volatility in the Canadian and other stock markets around the world.

Table 2:  S&P / TSX Composite Index from July 1, 2017 through to January 14, 2019.  Source:  YCharts.

In the June 30th, 2018Commentary I wrote the following: “The question today is: Will we see the Canadian market fluctuate back down to the 15,000 level OR will we see it move to new all-time highs beyond the 16,400 level?  From July 1, 2018 through to July 11th, 2018 we have seen a positive gain, with the index now trading at the 16,534 level.  Most of this has been a concentrated gain delivered by the energy sector.  This type of market moving activity is similar to what we saw in 2016, where the strong gains in the energy sector (+65%) resulted in strong gains for the stock market index (+29%).  However, these gains didn’t last as we saw the energy sector decline by almost 25% (from January 1, 2017 through to February 9th, 2018). Which in turn also drove down the overall Canadian stock market -1.66% for this 13-month period of time.

At this time the answer to this question is: Yes, we did move back to the 15,000 level and lower where the energy sector declined in value by 27% (June 30th, 2018 to January 14th, 2019).  Therefore, outperformance to the Canadian market has come from having an underweight exposure to the energy sector.

Now let’s look at the performance of other regions and sectors over the past 4 quarters.

Table 3:  Asset Class, Region and Sector Returns Over the Past 4 Quarters.  Source:  YCharts.

In Table 3 above we observe the following:

  • In 2018, the Canadian market declined by -11.60%, the US Market (S&P 500 Index) declined by

-6.24% and the Europe Asia Index (EFA) declined by -16.4%.  By comparison, the NFC Tactical Asset Allocation Pool declined by -2.67%.  This means that the NFC Tactical Pool protected against 77% of the decline in the Canadian market.

  • In the last 3 months, you can see how many sectors saw considerable declined: Canadian energy (XEG) -29.6%, US Health Care (ZUH) – 15.9%, US Banks (ZUB) -20.5% and the North American Technology sector (IGM) -18.1%.
  • Some of the companies that have seen the strongest gains in the past year also saw some of the largest declines in the past 3 months: Nvidia -48%, Amazon -25%, Google -13.5%, Apple -31%, Netflix -30% and Facebook -19%.
  • In the last 3 months the NFC Tactical Asset Allocation pool declined by -5.38%. I am a little disappointed with this outcome as we can see that some of our defensive holdings did not protect capital as much during this period of time as we would have expected.  As you can see in the table above the preferred shares did not do well, seeing declines of -9% and more, and higher yielding bonds declining by 7%.
  • While I am disappointed to see some of the defensive holdings decline by these amounts, we know that in time these investments will recover this value so we do see this as an opportunity to top up some of these holdings.

Now let’s take a look at some simple, comparative portfolios.

  • To build the portfolio we will use 3 securities: i) The broad Canadian bond market bond index (XBB) for the defensive component of the portfolio, ii) the S&P TSX Index for the Canadian equity component, iii) the MSCI World Index for the global component.
  • The Conservative Portfolio mix will be 60% defensive and 40% growth.
  • The Balanced Portfolio mix will be 50% defensive and 50% growth.
  • The Growth Portfolio mix will be 40% defensive and 60% growth.
  • Here are the historical returns of these comparative portfolios over the past 5 years ending December 31, 2018.

Table 4:  Comparative Portfolio Returns Ending December 31, 2018:  Calculated by NPMC using data from YCharts.

  • To put these returns into context, no additional portfolio management fees have been added to the portfolio cost. Many typical advisor scenarios would see additional fees of 0.75% to 1% added to the cost of this type of portfolio.  This means that the actual returns above would be reduced by another 0.75% to 1%.
  • These returns are based on a combination of the indices noted in the first chart above.

The NFC Tactical Asset Allocation Pool returns for these same periods of time are listed below (Source:  Croesus software).  This is the actual return on the overall pool value after all fees and expenses have been drawn from the pool as measured on a cash basis:

  • The NFC Tactical Asset Allocation Pool has outperformed each of the sample portfolios over each of the past 1, 2, 3, 4- and 5-year period of time.
  • This is really good and I am very pleased to share this information with you.
  • But with this being said, I also appreciate that a two-year return of +1.61% per year or a 4-year return of +3.45% per year is not a lot to be excited about.
  • So, it’s reallyimportant to keep in mind that the markets today are in a trough, as we can see from the declines of the past three months. When these markets recover we will see all of these figures rise.  For example, the pool returns ending September 30th, 2018 are as follows (Source: Croesus):

In other words, what a difference a few months can make.  This is just a low point in time when performance is being measured but it doesn’t mean that things have been performing poorly.  Rather, it is important to view this as just a timing issue.  But the fact that we have protected well over the past year, protecting against 77% of the decline in the Canadian market, positions us well for the next move upward in the market.

As of January 14th, 2019, we have seen the Toronto Stock Exchange increase in value by 4.5% since December 31, 2018.

So why did the markets perform like this?

In the June 30th, 2018 commentary I wrote the following:

  • The number one topic today is about Tarrifs and Trade Wars. Initiated by President Trump, additional trade tarrifs have been added to literrally dozens of goods that are commonly traded between nations.  A tarrif is an additional tax on an item entering another country, which in turn makes that item more expensive to the people who wish to purchase that product in that country.
  • What are the pros and cons to this type of activity? On the one hand, this is one way for a government to help local businesses compete better against larger businesses who are importing their lower cost goods from abroad.  But on the other hand, if the local consumer has little choice, then they are forced to pay a higher amount of money for this product, whether they like it or not.
  • Now, this last point is really important because when the prices of products are pushed higher due to these tarrifs, this can be “inflationary”; meaning that the costs of everything start to go up. For example, when the US applies tarrifs to imported steel, the higher cost of imported steel makes US steel manufacturing that much more competitive.  This is good for US steel related jobs, or is it?  As a result of this higher cost of steel, all related products that come from steel now also cost more as well:  cars, refrigerators, construction, and so on.  For consumers and businesses to afford these higher costs, businesses have to charge higher prices.  For consumers to afford these higher prices, their wages have to go up.  This is inflation; when the costs of everything begin to rise.
  • The negative outcome of higher inflation is also higher interest rates. To keep the rate of inflation at a target level of 1.5% to 3%, the Central Bank is responsible for raising interest rates when the rate of inflation begins to move to these higher levels.  The challenge for the Central Bank, however, is that it is not as simple as just raising interest rates one or two times.  Instead, inflation can quickly compound out of control, such as what we saw in the last half of the 1970’s.  Therefore, the role of the Central Bank is to be proactive and to raise interest rates gradually over time so that inflation never gets out of hand.

This is exactly what has happened.

Table 5:  The U.S. Federal Reserve Funds Rate:  2014 – 2019:  Source:  YCharts.

The yellow shaded area shows the changes that took place in 2018.  The Federal Reserve raised interest rates 3 times in March, June and again at the end of September.  There has been much debate about this topic:  Did the Federal Reserve raise rates too much or were they simply doing their job appropriately?

So why did the markets decline these past three months?

In my opinion, it has everything to do with a) a reasonably strong U.S. economy that was b) seeing inflationary pressures due to c) Trumps tariff wars which in turn force the Federal Reserve to d) raise interest rates as per above so as to keep inflation in check.  But when we combine this with a U.S. stock market that has a) had above average valuations during a time when b) the market has not seen a normal correction for 10 years, all of these issues combined create an environment where a correction would be very much expected.

Since the last report, what has happened with the NFC Tactical Asset Allocation Pool?

  • As mentioned previously in Table 4, a sample conservative, balanced and growth portfolio has generated some modest returns.
  • By comparison the NFC Tactical Asset Allocation pool has generated a higher return in the 1, 2, 3, 4- and 5-year period. This is good.
  • Over the past three months the NFC Tactical Asset Allocation Pool has protected against 52% of the decline of the Toronto Stock Exchange Composite Price Index while over the past 12 months this figure is closer to 77%.
  • Over the past 12 months we have achieved our goal of protecting against 70% or more of a market decline. 

What Have We Been Up to Over the Past Several Months?

When markets fluctuate, opportunities arise, but you do need to be careful.  Over the past three months we made 50 additional buys in the NFC Tactical Asset Allocation Pool.  Many of these were topping up current positions that had declined in value and that we wanted to continue to hold.  Some of these were new buys, such as Loblaws.

Table 6:  Loblaws Price Chart for Past 12 Months.  Source:  YCharts.

You can see the large 21% decline that took place on November 1, 2018.  We bought into Loblaws on November 2nd, 2018 at a price of $52.  Today it is trading at $64, creating a terrific gain of 23% over the past 45 days.  When markets are volatile like this, we want to try to take advantage of situations where there are sudden declines.  However, just because there is a decline like this does not mean that there will always be this type of gain, so to manage the risk you need to be very purposeful with the dollar amount you invest.

Over the past 3 months we have executed 51 sell orders.  Some of these orders would trim current positions to keep our profit, while others will be a complete sell to exit a position.

Table 7:  IShares U.S. Small Cap. Index (XSU) Price Chart for Past 12 Months.  Source:  YCharts.

On September 30th, 2018 the NFC Tactical Asset Allocation Pool had $911,414 invested in XSU, showing an unrealized gain of $127,000 or 28%.  This is great!  But we definitely don’t want to give this profit back to the market.

In a situation like this we look at the next most significant “low” level, which is the upper black bar above.  The all-time high was $36.78 on August 31st, 2018.  The more significant low is $34.69, which is the far left side of the upper black bar.  Our decision is to set up a stop loss order to sell half of our XSU shares IF the market chooses to trade this security down below the $34.69 level.  Our sell order was set at $33.83 and was triggered on October 10th, 2018. The next most significant lower low is shown with the lower black bar.  In this case we made a decision to sell the other half at a price of $30.67.  The market moved this security down to this level on December 6th.  Our concern was that this security could trade down the $28.75 level, or lower to the $26.25 level.

On December 26th, 2018, this security traded down to a current low of $26.63, representing a total decline of 27%.  If we had not made any trades at all, this security would have declined in value by approximately $235,000, which would have resulted in a lower pool return in both October and December.

But we did make some trades to protect capital.  By making these trades we were able to protect approximately $117,000 of additional profit.  If we multiply this type of protected capital across a number of securities, you can begin to see how in the end these steps help to create a smoother return in both your portfolio and in your holding in the NFC Tactical Asset Allocation Pool.

But now the next big question is when do we rebuild this position?  In our view we will want to consider adding back into this position in the $26 to $27 range.

Those are just two examples of the close to 100 trades we executed within the NFC Tactical Asset Allocation Pool during the last three months of the year.

What changes have been made to the NFC Tactical Asset Allocation Pool?

  • With these trades in mind, what changes have been made to the pool over these past three months?
  • Table 8 below illustrates the changes to the overall asset mix of the pool over the past 2.5 years. Note that the pool is very defensive today, with 54% held in defensive investments.  This is the most defensive position that we have held in the last 2.5 years.
  • Table 8 also illustrates the geographic weighting. With the changes made these past few months note that the Canadian cash position is now close to 10%, which is why the Canadian component has jumped significantly from 64% Canadian to 71% Canadian.

Table 8:  NFC Tactical Asset Allocation Pool:  Asset Mix for the period ending as displayed.  Source:  Croesus Software. 

Where Do We Go from Here?

In the June 2018 commentary I talked about the following: “One of my greater concerns today has to do with interest rates, inflation and something called the yield curve.  The yield curve is a chart that shows a comparison between interest rates over different periods of time.  The yield curve is currently “flattening” which is often an indication that a recession is ahead.”

More specifically, the gap between the 2-year interest rate in the US and the 10-year interest rate in the US is now only 0.27%.  This means that you would earn only 0.27% more interest per year invested in a 10-year US government treasury bond than you would in a 2-year US government treasury bond.  Going back to 2014, this gap was closer to 2.60%.  Since 2014 the yield curve has become increasingly flat, as the gap between the short-term rate and the long-term rate continues to narrow.”

In June 2018 I provided to you the following chart:

Table 9:  The Difference Between The 10-Year US Government Treasury Bond Yield and the 2-Year US Government Treasury Bond Yield as at June 30th, 2018.  Source:  YCharts.

We know that the U.S. Federal Reserve did raise interest rates throughout the year, so that the

10-2 Year Treasury Yield Spread is no longer 0.27% but is now at 0.18%.  On December 7th the spread was as low as 0.13%.  Again, we feel that this is something extremely important to pay attention to.

In June I added: “By increasing the rate this much, the spread between the short-term rate and the long-term rate may then be potentially negative.  This means that an investor would earn more by investing into a bond that matures in 2 years instead of one that matures in 10 years.  This means that the yield curve is now inverted, which is typically a predictor of a future recession.  For example, consider this article on Investopedia.com: (https://www.investopedia.com/terms/i/invertedyieldcurve.asp).

It is interesting to note that the last two times we saw an inverted yield curve in the US were (are you ready for this):  i) March 2000: just as the market began a 47% correction in the S&P 500 index that lasted over 3 years (March 11, 2000 to March 3, 2003) (Source:  YCharts) and ii) January 2007:  the S&P 500 index in the US peaked in October 2007, leading to a 56% correction in the market that lasted 17 months (October 1, 2007 to March 9, 2009).

So, what does this mean?

  • US markets (S&P 500 Index) have already declined by approximately 12%. From these levels, and from my perspective, we may have already seen a bottom or the downside risk may be another 10% to 18%.
  • In Canada (TSX Composite Index) has already declined by approximately 10%. From these levels, and from my perspective, we may have already seen a bottom or the downside risk may also be another 10% to 18%.

Therefore, we are managing the portfolios with these thoughts in mind, mindful of the risks and opportunities that this can bring.  We continue to wish to buy securities that have declined significantly in value (such as the Loblaws example) while managing risk and preserving capital (such as the IShares U.S. Small Cap Index ETF (XSU) example).

We know from the figures presented in the first part of this report that by following this type of strategy that we do protect capital well and we have ended up with above average short, medium and longer-term results.  Therefore, we continue to follow the same strategies at this time.

If you have any questions or concerns about your personal portfolio, please let me know.  I would be happy to meet with you at any time.

All the best!



Congratulations Lynda Perrick on Achieving the Chartered Investment Manager (CIM) Designation! Throughout 2017 and 2018 Lynda has written several exams and on November 6, 2018 she received her official CIM designation. Lynda’s expanded skillset enables Mike and I to delegate many additional portfolio analysis responsibilities to Lynda as she fills a key role in Nelson Portfolio Management Corp. today and for many years to come.

Secure Quarterly Statements: Version 2.0: We are now sending to you your quarterly portfolio statements in a slightly different manner. We have set up for each client family a secure and encrypted file folder using the Microsoft One Drive. In this folder, all historical portfolio statements will be stored. In this way, should you wish to access previous portfolio statements, you may do so at any time. As a second level of security, your report will now contain a password. The password will be the year of birth of the older spouse. As a third level of security, the report will not be sent as an attachment to your email. Instead, you will be sent a link to your unique folder once your statement is ready for viewing. Finally, as a fourth level of security, we will be able to retain records the extent to which you are viewing your statements. This will help us ensure that we are providing to you the information you wish in the way you most wish to receive it. Our objective is to continually explore ways to provide to you meaningful and timely statements, in a safe and secure manner. Please send us your feedback on this new, enhanced approach.

Discrepancies between the Nelson portfolio reports and the NBIN (National Bank Independent Network) monthly statements: We see that in some cases there are some small discrepancies between the total portfolio value seen on the Nelson statements and the NBIN monthly statements. In most situations these discrepancies are caused by the timing of when the NBIN statements are produced and when the data concerning the quarterly distribution for the NFC Tactical Asset Allocation Pool is provided to NBCN. This is a timing issue and not an error. Should you have any questions or concerns, or if you identify other discrepancies, please let us know immediately.

Paper vs. Secure E-Mail Link: It is NPMC’s preference to provide to you this quarterly portfolio package by e-mail. However, if you would like to receive this package in paper format, please let us know and we will accommodate your preference.


"IMPORTANT DISCLOSURES: The comments above are for information purposes only and do not constitute specific financial advice regarding your specific situation. Please consult a professional financial advisor who is familiar with your personal situation before acting on any information presented above. Every effort has been made to ensure this information is presented responsibly and accurately. However, important details may have been missed or these details may have changed since the publication of this note. All facts and opinions noted above must be reviewed to ensure their accuracy is still relevant based on today’s specific situation, whatever that may be. Nelson Financial Planning Corp is not responsible for any action you take regarding this information."