Quarterly Market Commentary

as of December 31, 2022


What's happened since the last report?

The following commentary represents the opinions and analysis of Doug Nelson, Portfolio Manager and Founder, Nelson Portfolio Management Corp. as of January 3rd, 2022.  Market and index returns noted below are based on the price changes for each quoted item for the period ending December 31st, 2021.  Market Statistics:  Source: https://ycharts.com

Happy 2022!  Well, 2021 was quite a year!

  • Over the past 3 months (October 1st, 2021 to December 31st, 2021) the Toronto Stock Exchange Composite Index (S&P / TSX Composite Price Index, TSX) increased in value by approximately +5.74%, driven primarily with gains in the Materials sector (+10.38%), Energy (+13.82%) and the Financial sector (+8.42%). Over the past 3 months it has been the Canadian technology sector (-3.61%), Industrials (-2.46%), Healthcare (+2.71%) and Utilities (+4.31%) that brought the averages down.  The 12-month return for the Toronto Stock Exchange Composite Price Index is +21.74%.
  • In the U.S., the broad-based New York Stock Exchange Composite Index (NYA) increased by +6.418% over the past 3 months while Europe & Asia (Symbol XIN, currency hedged EAFE index) increased by +2.38% and the MCSI Emerging Markets Index (XEM) declined by -3.08%. Over the past 12 months the New York Stock Exchange Composite Index increased by +18.17%, Europe / Asia by +15.4% while the Emerging Markets Index declined by -5.87%.
  • Over the past three months, the Core Canadian Bond Universe Index in Canada (XBB) gained by +0.92% and U.S. Investment Grade corporate Bond Index (XIG) increased by +0.04%. Over the past 12 months Canadian bonds declined by -5.25% while U.S. investment grade bonds declined by -3.87%.  The bonds decreased in value due to increases in interest rates in the bond market.  The 10-year U.S. government bond rate increased from approximately +0.93% to +1.55% over the past 12 months.  This is a very significant increase of approximately +66.0%!  However, when interest rates increase, the price of a bond declines, which is why we see the 1 year returns to be negative.

To put this into perspective, if a balanced portfolio held 60% in the TSX Composite Index (Canada) and 40% in the Canadian bond Index, then the return over the past 3 months would have been approximately +3.81% ((60% X 5.74%) + (40% X 0.92%) = 3.81%).  By comparison, the NFC Tactical Asset Allocation Pool gained in value, net of fees, by +4.71%.  Over the past 12 months, the balanced portfolio would have generated a return of approximately +10.9% while the NFC Tactical Asset Allocation Pool gained in value, net of fees, by +17.82%.

Now let’s take a look at Chart 1:

Chart #1:  TSX Composite Price Index:  September 3rd, 2013 through to December 31st, 2021.  This shows how the rates of return are calculated based on where the market was on December 31st in previous years. Source:  https://ycharts.com

From the table above we can make the following observations:

  • The pre-COVID 19 market peaked on February 20th, 2020 and bottomed on March 23rd, 2020 (this is the significant decline that we see on the right-hand side of this chart).
  • Measuring from the market bottom (March 23rd, 2020) through the remainder of 2020, the Toronto Stock Exchange Composite Price Index increased in value by approximately +55% (the far-right green bar).
  • Now we see that 2021 brought us an additional 21.74% return.
  • To put this time period into some further context, between February 20th, 2020 (the pre-COVID 19 peak) and today, we see the total increase to be +18.27%, or an annualized return of a more reasonable +9.43% per year. By comparison, the NFC Tactical Asset Allocation Pool also has an annualized return of +9.22% per year since February 20th, 2020.
  • We can also see that in the last 3 months of 2018 (2nd green bar from the right), there was a market decline of approximately -11.0%. Due to the low point in the market on December 31st, 2018, the three year returns also look really good today.

I am illustrating these points in time because historical returns are influenced by these low points and high points, especially when the most recent period is after a year of large gains (such as what we see today).  When looking at both the three year returns and the five-year returns, these figures are influenced not only by the large gains in 2021, but also the lower levels of the index 3 and 5 years ago (2nd green bar and 4th green bar, from the right).

Key takeaway #1:  Historical returns are influenced by both their start dates and end dates for the period that is being measured.  In some periods of time, like we see today, you see a double win:  where the starting point is at a lower historical level and the end point is at an all-time high.  Therefore, when considering rates of return, it is always important to consider both the start and end dates, which is why I like to prepare, display and relate to Chart #1 in these commentaries.

Key Takeaway #2:  With Chart #1, if you move the green bars a few centimeters to the right, you will see that 12 months from now the starting point for the 7-year return will be much lower (which may make the 7-year return figure look really strong) while the starting point for the 3-year return number will be much higher (close to the peak of February 2020, which will make the 3-year return number to be that much lower).

Here’s another way to look at this same dynamic:

  • If we divide 21.74% (the return on the Toronto Stock Exchange over the past 12 months) by 3 (years), we see a number of +7.25%. This means that the gain over the past 12 months has added approximately +7.25% in additional rate of return to each of the last three years (the 3-year rate of return number).  If the 3-year rate of return number is +13.99% per year, then we can conclude that half of this return figure (approximately +7.25% of 13.99%) came from the returns over just the past 12 months.  If the rate of return for the past 12 months was zero, for example, the 3-year return would have been only approximately 7.0% per year.  If the rate of return for the next 12 months is zero, then the 3-year return will also be in the 7.0% range.

Key Takeaway #3:  This is a very important observation:  We can see how much the most recent returns can impact the long-term rate of return calculations both positively and negatively.  This is why it is really important to evaluate returns over multiple time periods, and again why I like to generate the image above for reference (Chart 1).

Why am I spending time on this subject today?  I am spending time on it because I want to set some reasonable rate of return expectations going forward.  While it is nice to see these large annual returns at this time, these historical annual return figures will likely be lower in the future simply due to the normal fluctuations of the equity markets.

Moving on from this discussion point, below is my updated table of the quarter-by-quarter performance of countries, regions, and sectors.  The big takeaway is how different sectors perform throughout the year.  Over the past 3 months we see that the Canadian Materials sector generated a positive return of +10.38%, yet over the past 12 months it is only +2.36%.  By comparison, U.S. Health Care is +2.71% over the past 3 months yet it is +15.28% over the past year.  This demonstrates the importance of diversification, but also the importance of patience.

Table 1:  Asset Class, Region and Sector Returns Over Past 4 Quarters and Last 12 Months.

Source: https://ycharts.com


  • In the table above you can see that we had strong gains in the first 6 months of the year. The summer months were flat to slightly negative, but we saw a strong finish to the year, despite concerns about rising interest rates and inflation.
  • It is also interesting to see that the TSX Composite Index (the Canadian market) outperformed the New York Stock Exchange Composite Index, perhaps due to those same concerns about inflation. In an inflationary environment, hard assets can do reasonably well, such as Energy, Materials and Real Estate, all of which had positive gains these past three months (+13.28%, +10.38% and +7.38% respectively).  The Financial sector can also do well during a rising interest rate environment, which is part of the reason why we also saw strong gains in the Financial sector in Canada (+8.42%).  By comparison, it is interesting to see that the U.S. banks did not see those type of gains over the past three months (ZUB: +1.97% vs. XFN: at +8.42%) yet over the past 12 months, the U.S. banks outperformed the Canadian banks (ZUB: + 36.6% vs. XFN: at +31.63%) (ZUB: the BMO Equal Weight US Banks Hedged to CAD ETF and XFN: iShares S&P/TSX Capped Financials ETF).
  • As concerns around inflation rise, it is interesting to see that Gold has increased by only 4.1% over the past 3 months and is actually -4.15% over the past 12 months. Source: https://ycharts.com
  • The change in the value of the Canadian dollar was minimal over the past 12 months.


In this environment, how has the NFC Tactical Asset Allocation Pool performed? (Source:  Croesus)

Over the last three months the NFC Tactical Asset Allocation Pool gained in value by +4.71% and is +17.82% for 2021, net of all fees and expenses.

By comparison, over the past 12 months the price return on the broad Bond index (XBB) was -5.25% and the Toronto Stock Exchange (XIC) price return was +21.74%.  If 60% of a comparative portfolio was invested in the Toronto Stock Exchange and 40% was invested in Bonds, then the 1-year return is approximately +10.94% % ((60% X 21.74%) + (40% X -5.25%) = +10.94%), which is well below what we see with the Tactical Pool return as mentioned above.  Over the past 12 months the Defensive Component of the Tactical Pool generated returns of +6.81% while the Growth Component generated returns of +25.37%.

Today the pool has an asset mix of 2.0% cash, 33.61% defense and 64.39% growth, which has been consistent throughout 2021.  This means the pool is in a growth-oriented position at this time.

Table #2:  Historical Asset Mix of the NFC Tactical Asset Allocation Pool:  Source:  Croesus

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

Over the past three months we executed 20 buys and 8 sells in the NFC Tactical Asset Allocation Pool.  Most of the buys were topping up positions that had seen some recent declines while the sells were trimming those positions that had seen the greatest gains.  In the past 3 months we triggered close to $500,000 in capital gains due to various significant gains we had earned on some of our holdings.

The three most notable new buys were Disney and DocuSign and we made an additional investment into the Avenue Living Private Real Estate Core Trust (https://www.avenuelivingam.com/fund/core-trust/).  Disney is currently trading approximately 25.0% below its 52-week high and DocuSign is 50.0% off of its 52-week high.  We believe that these are both good long-term investments, and so this past Fall we started to add to these positions.  The Avenue Living Core Trust has generated an average return of 8.0% per year since inception.  As a Private Real Estate Trust, it has a tendency to not fluctuate in the same way that the investments in the stock market will fluctuate.  Thus, it is very helpful to have this type of investment inside the NFC Tactical Asset Allocation Pool, providing the potential for an excellent return with minimal volatility.

Lynda Harris (Portfolio Manager) and I have also spent a considerable amount of time researching additional “private real estate” and “private lending” investment opportunities.  These are investments, such as the Avenue Living Real Estate Core Trust, that are not actively traded in the stock market, thus they have the potential to provide a reasonable return (5.0% to 8.0% annually) with less market volatility.  Due to today’s lower interest rates, many companies have been redeeming their current bonds and reissuing new bonds at lower interest rates.  This is good for the company and for the stock price, as that will help the company be more profitable.  However, for you and I as investors, the rate of return on the defensive side of the portfolio will now be lower, unless we find some alternative investments to consider.  As the pool has grown in value over this past year, we have needed to seek out additional investment options in the private lending area, so that we don’t “overconcentrate” our holdings.  We have found several new options that we are comfortable investing with at this time and we view this as good!

Finally, in the September 30th, 2021 Quarterly Market Commentary I also talked about some of the new holdings we added during the summer.  Here is an update:  Sherwin Williams (Consumer / Industrial Sector, +24.0% gain), Stanley Black & Decker (Consumer / Industrial Sector, +7.27% gain), John Deere (Agriculture; +1.16% gain), Tourmaline Oil Corp. (Natural Gas; +19.0% gain), and Novo Nordisk (Pharmaceutical; +17.0% gain).

To reiterate, I talk about the pool throughout this commentary; the NFC Tactical Asset Allocation Pool performance will be similar to the performance of your own portfolio, depending on your overall asset mix, risk profile and fee structure. 

Where Do We Go from Here?

So now let’s take a look at the overall market risks today.  Are we due for a larger correction in 2022?

Below is a chart of the Toronto Stock Exchange Composite Index over the past 10 years.  This chart shows the index (blue line) as well as two historical moving average calculations (orange line and red line).  The orange line is the 50-week average of the blue line (the index) while the red line is the 200-week average of the blue line (the index).  You can see that over time the index (the blue line) will move along the path of the short and long-term moving average lines, yet today, the index (the blue line) is above both of these lines (on the right-hand side of this chart).  What does this tell us about the future potential direction of the market?

Graph #2:  TSX Composite Price Index:  10-year Technical Analysis Chart:  Source:  https://ycharts.com

In general, we see plenty of times in history where the index (the blue line), eventually retreats back to the long-term moving average (the red line).  Should that take place in 2022, this would be a correction from the current index level (21,222) down to approximately 17,035.  This is a difference of 4,000 points or an estimated decline of approximately -25.0%.  Could this happen at some point?  The answer, in my view, is yes.  Am I concerned about this happening in the next 3 to 6 months?  No, I am not too concerned about this happening at this time.

Alternatively, in my view, we will most likely see a decline, at some point in 2022, down to the 18,000 to 19,000 level, which would be a correction of -10.0% to -15.0%.  This would be very normal and should be expected as interest rates are expected to rise throughout 2022.  This is one of the reasons why we continue to take profit where it seems prudent to do so and reinvest this profit into other securities that are already trading +25.0% to +50.0% off of their 52-week highs (such as Disney and DocuSign).

If we looked at similar charts for other markets around the world, we would see something similar:  market indexes could decline by as much as -25.0%.  However, we also see many examples of companies that are already trading 25.0% or more below their 52-week highs.  We view this as good!  Therefore, to help to protect against a future downturn, we are continuing to take profit on those investments that have the potential for the greatest downside risk and invest into those securities that have had the potential for the greatest correction.  We believe those companies that have corrected the most are likely to decline less if markets move downwards.

In the chart above, we also see another indicator called the Relative Strength Indicator (RSI).  The current reading shows 58.93.  A reading greater than 70 is typically an indication of shorter-term risk while a reading of 30 is considered to be an excellent buying opportunity.  At the 58.93 level, I don’t believe that the TSX is poised for a correction at this time.  However, should we see i) markets continue to rise into April 2022 (which is part of their normal, positive seasonality pattern) and ii) interest rates rise in the meantime, then I would also expect to see a rising RSI, which may then prompt us to increase our cash weight as the year progresses.

Predicting the future market direction is always difficult as sentiment changes daily.  We will continue to watch the market, and our investment holdings, and act accordingly as the days, weeks and months unfold.

Should you have any questions or concerns about this commentary, our approach or your specific portfolio, please reach out to Lynda or I.  We would love to review your portfolio in detail with you any time you wish.

2021 was certainly a very interesting year.  Looking ahead to 2022, it will no doubt be just as dynamic.  Thank you, as always, for the continued trust and confidence that you have placed in my team and I.

All the best for 2022!



  • Lynda Harris has achieved registration as a Registered Portfolio Manager: In September 2021, Lynda’s registration category changed from that of an Associate Portfolio Manager to a Portfolio Manager. This means that Nelson Portfolio Management Corp. now has two registered Portfolio Managers (Doug and Lynda). Lynda joins me in the day-to-day management of $130+ million of client portfolios and is a co-manager of the NFC Tactical Asset Allocation Pool. Lynda and I are both members of the BCV Asset Management Investment Committee, which now managers over $3.5 billion of client portfolios.
  • Book Value vs. Market Value on Your National Bank Independent Network (NBIN) statements: The book value information on your NBIN statement is not your net invested value.   Rather, the book value is the total of your invested value minus withdrawals and plus any dividend income received.  Thus, part of your investment return over time will show up as part of your book value.  Therefore, please do not compare the book value and market value on your NBIN statements and believe that the difference is your investment return.
  • Discrepancies between the Nelson portfolio reports and the NBIN 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 NBIN. 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 accordingly.

"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."