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 April 3, 2019.  Market and index returns noted below are based on the price changes for each quoted item for the period ending March 31, 2019.  Market Statistics:  Source: https://ycharts.com.

  • Over the past 3 months the Toronto Stock Exchange Composite Index increased in value by approximately +12.42% from January 2, 2019 through to March 31, 2019. While this is an impressive and welcome gain, we have seen this movie before several times now over the past few years (See Table 1).  This gain recovered the declines that we saw from September 30th to December 31st, 2018.

Table 1:  S&P TSX Composite Index from January 1, 2017 through to March 31, 2019.  Source: YCharts.

In the table above, please note the following observations:

  • In previous commentaries I talked about the gain that we saw from September 8th, 2017 to January 24th, and how this gain was offset by the decline from January 24th, 2018 through to February 9th.
  • I have also spoken about how the Toronto Stock Exchange recovered from that decline with gains through to July 12th, 2018. In 2018, the Canadian market had only a +0.42% return between January 1, 2018 through to June 30th, 2018.
  • As can be a typical situation, the markets had a slightly negative return through the summer months of 2018 which is where we see a modest decline of -1.26% from July 1, 2018 through to September 30th. July 12th marked the high point for the Toronto Stock Exchange in 2018.
  • The Canadian equity market then declined by 11% during the last 3 months of 2018, only to recover from this decline, yet again, with a gain of 12.42% during the first three months of 2019.

What does all of this mean to us today?  There are several important points to consider:

  • Your Historical Portfolio Returns: Depending on the date of your portfolio statement over the past couple of years, the historical returns will be measured either at a market high or at a market low.
  • Now that we have recovered from the previous low point, will this market finally break out into a new growth cycle or do we need to remain cautious that we could fall back, once again, to some of these lower levels? More on this to come.
  • Over the past 2 years and 3 months, we see that the Toronto Stock Exchange has fluctuated within a 10% to 12% range: We gained 9% from September 2017 through to January 2018, then we declined by 8%.  We gained 10% from February 9th, 2018 to July 12, 2018 only to decline once again by 13.55% to December 31st, 2018.  Now we have seen a gain of +12.42%.
  • Conclusion #1: The Canadian market over the past 2 years has been directionless.  It has been trading sideways within this same range.
  • Conclusion #2: The total price return of the Toronto Stock Exchange composite index during the last 2 years and 3 months is only +5.33%.

But now for some better news.  Just because the markets have had these significant fluctuations doesn’t mean that this has to happen in your portfolio.  The NFC Tactical Asset Allocation Pool (the core of your portfolio), fluctuated 60% less than the market yet generated a return that was 45% higher (Note: the standard deviation of the NFC Tactical Pool for this time period was 4.3% vs. the TSX at 10%.   Annualized return for the NFC Tactical Pool was +3.42% per year which equals a total return of 7.7%.  Source: Croesus).

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

Table 2:  Asset Class, Region and Sector Returns Over Past 4 Quarters.  Source:  YCharts.

In table 2 above we observe the following:

  • Look at the relationship between the rates of return in the first two columns. This is comparing the returns of different types of investments between the first three months of 2019 (column 1) and the last three months of 2018 (column 2).  Most investment categories have not fully recovered from the declines that took place in the last 3 months of 2018.
  • For example, over the last three months of 2018 we see the Toronto Stock Exchange decline by -11.1% and a 12.42% gain in the first three months of 2019, resulting in a zero percent return over the past 6 months. In the Canadian financial and energy sectors we see 6 month returns of -3.65% and -21.44%.
  • In the U.S. markets we see the S&P 500 index with a 6 month return of -3.08%, U.S Health Care at -5.44%, U.S. banks at -13.35% and U.S. technology at -1.67%.
  • Internationally we see a 6 month return -4.72% with the Europe / Asia index (EFA) and a positive 3.96% gain in the emerging markets. The emerging market gain can be attributed to a declining U.S. dollar over the past 3 months.

By comparison, the NFC Tactical Asset Allocation Pool had a return of -1.15%.  In the same way that the overall market declined and then recovered over the past 6 months, so too did your portfolio, but without the same degree of volatility.

  • Now look at the column on the far right to see the 12 month returns ending March 31, 2019. The Toronto Stock Exchange had a 12 month return of +4.78%, the U.S. market (S&P 500 Index) +7.33%, Europe / Asia Index (EFA) -6.92% and the Emerging Markets (XEM) -7.86%.
  • Perhaps it is no surprise to see the Canadian Energy Index at -13.1% given all of the uncertainty regarding pipeline construction, but by comparison it is nice to see the 15% gains in the real estate index (XRE).
  • In the U.S. we see a 9% gain in health care but a 15% decline in U.S. banks.
  • Needless to say, there was a tremendous amount of volatility these past 6 to 12 months and over the last several years. Depending on the sectors in which you were invested you could have had very different investment outcomes.

By comparison, over the past 12 months ending March 31, 2019, the NFC Tactical Asset Allocation Pool generated a return of +2.41%.  In general, we strive to capture 70% or more of the upside of the Toronto Stock Exchange.  Over the past year the TSX increased by 4.78%.  70% of this figure is 3.35% which is greater than the return of 2.41%.

This means that for the first time in a long time, the NFC Tactical Asset Allocation pool has not met its performance target.  This means that we need to take a closer look at this, determine why this happened and then decide if this means that we need to modify our investment management strategy.

Let’s begin this analysis by taking a look at Table 3.

Table 3:  S&P TSX Composite Index 4 Year Chart:  January 1, 2015 through December 31st, 2018.  Source:  YCharts.

In table 3 above we observe the following:

  • The yellow shaded area on the right-hand side is the decline we saw during the last 6 months of 2018. At that point in time we see that the Toronto Stock Exchange composite index had made a significant move downward.
  • The question at that time was: how much lower could this market go?
  • To try to answer this question, we look at previous times in the past when other lows occurred in the market. We look at these past levels because that is where “buyers stepped back into the market” and began to push things higher again.
  • Seeing that the market had already moved past other historical low points, we felt that there was the potential that the market could drop to the 12,500 level. This would be a further decline of 1800 points on the index or another 12.5%.  This is pointed out with the addition of the red arrow on this chart.

What if we were right and the market did drop to this level?  How might things have looked?

  • 12 months ago, the TSX index was at 15,367. If today the index was at 12,500 we would be documenting a 12 month return of -18.6%.
  • From the market high of July 12th, 2018, the total decline would have been 25%.
  • It’s important to remember that these types of corrections are normal.
  • What would the return potentially be for the NFC Tactical Asset Allocation Pool? This is unknowable and it is not appropriate for us to speculate, however, we could consider the following data to help give us a range.

Looking at the October to December 2018 time period, the 1-year return for the NFC Tactical Asset Allocation pool, ending October 31st, November 30th and December 31st is as follows.

Table 4:  Annual Rate of Return Comparison By Month

The actual 12 month returns for the NFC Tactical Asset Allocation Pool, for the year ending October 31st was +0.12 when the TSX Composite Index had declined by -6.25%.  On November 30th the 12-month return was -0.26% for the pool and -5.24% for the Toronto market (95% downside protection) while the 12 month return ending December 31st was -2.62% (vs. -11.64% for the Toronto Stock Exchange, with a 78% downside risk protection).  When we measure performance in this manner, the NFC Tactical Asset Allocation pool performance met its goal of protecting against 70% or more of the downside.  This is good!

Now let’s look at downside protection for each individual month this past fall.  We see that in October we protected against 48.6% of the downside move to the market and in December we protected against 54.3% of downside move.  This makes good sense to me because as the downside move to the market progressed, we would always be increasingly defensive.  This means that the first downside move to the market (October) should always have the least downside protection, but as the downside move gains momentum, the amount of protection increases.

Table 5:  One Month Rate of Return Comparison:

With these figures in mind, let’s assume the downside risk protection for the NFC Tactical Asset Allocation pool could have been between 60% and 75% over the year ending March 31st, 2019, assuming that the Toronto Stock Exchange did decline down to the 12,500 level on the index.  As an average, let’s use 68%.  If this were the case, then the 12-month return for the NFC Tactical Asset Allocation Pool could have been as follows in Table 6.

Table 6:  Estimated Downside Risk Protection (speculative estimates, not guarantees, not actual figures):

With these estimates in mind, the 12 month return of the NFC Tactical Asset Allocation pool may have been between -4.65% and -7.44%, in a sample market environment where the TSX Composite Index declined by -18.6%.

Remember, these are only estimates and they are a representation of the things that we think about when managing your portfolio.  When managing your portfolio, we always think about:

  • Where is the market today?
  • Do we feel that the risks of a decline are high or low?
  • Do we feel that the opportunities for growth are high?
  • How should we tilt the portfolio at this time? Should we focus on adding more income?  Should we focus on being more defensive or adding growth?

Perhaps the most important question of all:  what if we tilt the portfolio in one direction, yet we are wrong, and the market moves in the opposite direction?  What might be the impact on the portfolio?

We call this approach “scenario building”.  This process helps us consider the downside risk of all of the securities we own as well as the downside risk of the portfolio.  So, while the figures noted above are only estimates, I wanted to share with you today the things we were thinking about in December and January as a way of putting into perspective how we were managing your portfolio.

Why do I share this?

While we were concerned about further potential downside to the market, the markets moved in the opposite direction.  The markets went up.  But not only did they go up, they went up a lot in a short period of time.

Table 7:  S&P TSX Composite Index 1 Year Chart Ending March 31st, 2019.  Source:  YCharts.

In the chart above we observe the following:

  • The yellow shaded area is the month of January 2019.
  • During this month the Toronto Stock Exchange composite index gained in value by a considerable 8.11%.
  • This particular increase was quite unique in that there were several points when this upside move could have ended. It could have ended at the 14,750 level, the 15,250 level and also the 15,707 level.  But it didn’t.
  • Therefore, the 3 month return for the Toronto Stock Exchange composite index was +12.42% (see Table 2), of which 8.11% occurred in January. The bulk of the gains over the past 3 months took place in the first 4 weeks of the year.

By comparison, the NFC Tactical Asset Allocation Pool performed as follows:

Table 8:  One Month Rate of Return Comparison:

  • The pool had a positive return of 1.85% during the month of January vs. the 8.11% gain in the market. The upside capture was only 22.8%.  Why is this?  This is because of the increasingly defensive position taken on through the fall of 2018.
  • But in February, as we began to adjust the portfolio, we see that we captured 51% of the upside move, and by March, the NFC Tactical Pool out-performed the market with a return of 0.84% vs 0.64% for the index.

Now let’s compare the trends in Table 5 and Table 8:

  • When markets begin to roll over, we evaluate each of our individual securities and decide at what point we wish to take profit and increase our defensive position. As markets continue to decline, the NFC Tactical Pool takes on an increasingly defensive position as we see in Table 5.  In December the degree of downside risk protection was greater than in October.  In November, due to our more defensive position, we didn’t capture as much of the upside gain.
  • Am I comfortable with this approach? Yes, I am because when we measure the 12 month returns in Table 4, we see very good relative outperformance, protecting against 78% of the downside move in the Toronto stock exchange in 2018.
  • But when markets begin to rise, we see in Table 8 that we may not capture as much of this first move up in the market, due to our more defensive stance.

So, while the strength of our approach is to protect against the downside, the weakness to this approach is shown when there is a strong rebound to the market over a short period of time.  We saw this same thing occur in 2016.  From the market low of January 20th, 2016 through to March 17th, 2016 (2 months), the TSX composite index gained 15%.  This was a strong gain in a short period of time, which is similar to the 11.5% gain in the first two months of 2019.  The period before that was a 17-month decline, from September 2014 through to January 20th, 2016, where the index declined by -24%.  The NFC Tactical Pool protected against almost 100% of this decline with a return of only -1%.  Therefore, when the markets took off in January 2016, and gained in value by 15% in two months, the NFC Tactical Pool gained only 3.6%.

This analysis is really important:

  • Our belief is that over time you will have a better financial outcome by protecting against declines rather than striving to capture all of the upside of the market. We see this outcome in our longer-term returns.
  • However, the weakness of this approach is that when markets do rebound quickly, we do not participate in as much of the first move upwards.
  • We have seen this in the January to March 2016 time period as well as the January 2019 time period.
  • But over time we do see excellent out-performance and risk and return metrics. See Table 9.

Table 9:  5 Year and 7 Month Historical Risk and Return Data for the NFC Tactical Asset Allocation Pool.  Source: Croesus.

  • The above table shows us the risk and return data of the NFC Tactical Pool since its inception.
  • The pool has generated, as at March 31, 2019, an annualized rate of return of 6.16% per year after-fees (the blue triangle). By comparison, the S&P TSX Composite index (the yellow dot) has generated an annualized return of only 3.09%.
  • The standard deviation of the pool was 4.29% vs. the TSX at 9.05%.
  • This shows us that since inception the NFC Tactical Pool, by following our risk management strategy consistently over time, has generated an investment return double that of the Toronto Stock Exchange at 50% less risk.

To conclude:

  • We know that we have not met our target return at this time.
  • We also know why we have not met our target return (we missed much of the January upside).
  • But we also know that this environment is one of the only times when we typically underperform relative to our targets: an environment where there is a steep decline followed by a very steep and fast recovery.
  • Yet, despite this under performance this past January, the long-term risk and return relationship continues to look very good (Table 9: Double the return with 50% less risk than the Toronto Stock Exchange price index).
  • We are very proud of these results.

Please let me know if you have any questions or concerns about this analysis as it is important to understand how we manage money and how we perform across different market environments.

So why did the markets perform like this?

In the December commentary I wrote the following when talking about the decline we had seen in the equity markets:  So why did the markets decline these past three months? (October to December 2018).

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 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, and c) we continue to see a flattening of the yield curve (see previous commentaries) all of these issues combined create an environment where a correction would be very much expected.

It is for reasons such as the above that we were surprised to see the market rebound to the extent that it has.  However, even though we have seen this rebound take place, the same concerns persist that a decline at some point in time is a high probability.  The big question remains:  when?

Why did the markets rise so much since the end of December?

One of the main triggers to this upward move is the same trigger that contributed to the downside:  the concern over rising interest rates.  In late December the Federal Reserve, in the U.S., began to speak about slowing down the pace of any further increases in U.S. interest rates.  The main concern at the time was that if rates continue to rise then the yield curve will invert (i.e. short-term rates will be higher than longer term rates) and that could trigger a recession.  Instead, if the Federal Reserve slows down the pace of future interest rate hikes, then this in turn would mean there is less chance of an inverted yield curve and less chance of a recession, therefore, stocks rally.

But the irony to this is as follows.  President Trump speaks about the strength of the U.S. economy.  If the economy is strong, inflation will begin to appear, and it is the job of the Federal Reserve to keep inflation in check by increasing interest rates.  That is exactly what they were doing in 2018.  But now that the pace of future interest rate increases has been slowed, then this should mean that the U.S. economy is really not as strong as expected and that this could trigger a decline, at some point, in the equity markets.  However, President Trump says the economy is strong.

Therefore, the market has been extremely volatile within a 10% to 20% trading range.  Today we are benefiting from the recent upside moves and there is some evidence that this trend may continue a little longer.  Perhaps a trade deal between the U.S. and China, and resolution to the Brexit situation, will help to push the markets higher into the summer months.  Therefore, at this time, if the markets wish to continue to rally, we are ready to take full advantage of these gains.  However, if markets begin to run out of steam, we still need to remain vigilant and cautious regarding another potential downside move. 

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 45 additional buys in the NFC Tactical Asset Allocation Pool representing approximately $4.5 million.  This means that the dollar size of our average buy was only $100,000.  Why is this?

When markets fluctuate, we want to top up current positions that we like and take advantage of these lower prices.  At the same time, we would also like to add new positions to the portfolio that we believe are now under valued and have strong upside growth potential.  Here are a few examples of some new purchases:

  • 13 new purchases in the month of December. The current total average gain is +22%.  By comparison, the gain in the value of the Toronto Stock Exchange since December 15th is +11.9%.
  • 14 new purchases in the month of January. The current total average gain is +11%.  We made top up purchases in 5 other positions.  By comparison, from January 15th through to today the gain in the value of the Toronto Stock Exchange is 8.54%.
  • 9 new purchases in the month of February, with 11 top up purchases in other securities we currently hold. The current total average gain is +6.41%.  From February 15th through to today the gain in the Toronto Stock Exchange is 3.11%.
  • Again, I find these comparisons interesting because it reinforces to me that the type of buying that we do, when the markets are down in value, have proven to be beneficial thus far.

Another analysis that we have done is looking at our core Exchange Traded Fund (ETF) holdings.  These securities are widely held across most client portfolios.  Are these holdings adding value to the portfolios?  Yes, all of these holdings continue to add value for the portfolio returns.

Table 10:  Historical Returns of our Core Exchange Traded Fund Holdings.  Source:  YCharts.

Where Do We Go from Here?

With all of the lengthy explanations in this commentary, I am going forward with confidence to continue to do as we have always done.

Looking at the historical returns ending December 31st, we see that the combination of our risk management approach, the above average performance of our core Exchange Traded Fund holdings (see Table 10) and our focus on yield, protected your capital against 77% of the market declines in 2018 yet has also produced a higher longer term investment return over the past 3 and 5 years (Table 11).

Table 11:  Historical Investment Returns, Net of Fees vs. the S&P TSX Composite Index.  Source:  Croesus.  YCharts.

Looking at the historical returns ending March 31st, the three and the five-year returns have also done well relative to the Toronto Stock Exchange.  The outlier is the 1-year return ending March 31st.  The purpose of this report is to demonstrate why we under performed during this period (we missed much of the gain in the month of January because the portfolios were still tilted towards defense).

Table 12:  Historical Investment Returns, Net of Fees vs. the S&P TSX Composite Index.  Source:  Croesus.  YCharts.

When I see the outperformance of the pool over time and the extent to which we have protected well during periods of market decline, I remain confident in our approach and see no need to make any changes at this time to this approach.

With this in mind, we continue to watch the ebb and flow of the market each week.  We continue to evaluate the role that each investment plays in the portfolio.  We continue to focus on gaining a regular stream of investment income from the portfolio while also continually measuring and managing potential downside risk.  We do believe that there is a correction that is coming soon, perhaps as early as later this spring or early summer.  But in the meantime, if the markets wish to continue to rally, then we want to take as much advantage of that as is reasonable.

Today we continue to invest with confidence by looking for investments that have better downside risk protection than the market overall.  We continue to take profit when the risks appear to be high and we continue to use an active stop loss strategy to manage risks.

I appreciate that I went into a lot of detail in this commentary, but I felt it was important to share with you the depth and the breadth of the things we do each day when managing your hard-earned savings.  We take this work very seriously and greatly appreciate the trust and confidence that you have placed in us.

If you would like to get together for a personal portfolio review, please let me know.

All the best!



  • Lynda Perrick, Associate Advising Representative: Please join me in congratulating Lynda on being registered with the Manitoba Securities Commission as an Associate Advising Representative.  Upon completion of her Chartered Investment Manager designation this past fall, and meeting the relative work experience requirement, Lynda is now in her apprentice period to be fully licensed as a Portfolio Manager.  Lynda has worked very hard to achieve this milestone and we are very happy for all of her success so far.  Lynda will continue to play an increasing role in meeting with clients to perform portfolio reviews, she is involved in doing ongoing suitability reviews of all client portfolios and is a member of the investment committee responsible for the management of the NFC Tactical Asset Allocation Pool.
  • Book Value vs. Market Value On Your National Bank statements: The book value information on your National Bank 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 National Bank statements and believe that the difference is your investment return.
  • 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 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."