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, Portfolio Manager and Founder, Nelson Portfolio Management Corp. as of April 1st, 2023.  Market and index returns noted below are based on the price changes for each quoted item for the period ending March 31, 2023.  Throughout this report, whenever I reference a specific market or sector, I am using the data from a specific Exchange Traded Fund that is meant to mirror the returns of the index.  When I do this, I am sharing with you the Symbol of that ETF so that you can do your own research and can mirror some of the analysis that I have done.  Market Statistics:  Source: https://ycharts.com

Market returns from January 1, 2023 through to March 31, 2023:

  • Over the past three months, the Toronto Stock Exchange Composite Price Index (TSX) increased by +3.69%. The sectors in Canada that contributed most positively to these gains were the Materials sector (XMA; +7.59%), Utilities (XUT; +5.55%) and Technology (XIT; +23.4%).  The sectors that contributed less to the overall performance over the past three months were Financials (XFN; +0.66%) and Energy (XEG; -5.43%).
  • In the U.S., the broad-based New York Stock Exchange Composite Index (NYA) increased by only +1.26%, the S&P 500 Index (SPX) increased by +7.03% while the Nasdaq 100 Index (NDX) increased by +20.49%. These are very interesting differences, due in part to just a handful of companies.  For example, 50% of the weighting in the Nasdaq 100 Index comes from just 7 companies and their year to date returns are:  Microsoft (MSFT; YTD:  +20.22%), Apple (AAPL; +26.87%), Google (GOOGL; +17.57%), Tesla (TSLA; +68.45%), Nvidia (NVDA; +90.07%), Amazon (AMZN; +22.96%) and Meta (previously known as Facebook; META; +76.16%).  These same companies now represent 24% of the S&P 500 index (in December they represented 18% of the index) and a much smaller component of the 2,400 listed companies in the New York Stock Exchange Composite Index.
  • Thus, much of the story over the past three months has been related to the out-performance of the large technology companies, whereas much of the overall market saw mostly flat or negative returns, as we can see in the more broad-based New York Stock Exchange Composite Index (NYA). In Canada, the Technology sector represents 7.0% of the overall index.  With a three month gain of +23.4%, this sector contributed to approximately half of the total gain of the index over the past three months.  Again, this is interesting because technology has been the story for both 2022 and 2023.  In January 2023 I wrote how technology contributed to most of the declines in 2022 but has now contributed to most of the gains in 2023.
  • Internationally, the Europe / Asia index (EFA) gained by +9.0% and the Emerging Markets (XEM) gained by +4.2%.
  • Defensive investments, such as the broad Canadian Bond Index (XBB), generated a price return of +2.38% for the past three months. S. corporate bonds (XIG; +3.6%) and U.S. high yield bonds (XHY; +1.78%) also saw some reasonable gains.

With these numbers in mind, why did the defensive investments above increase in value and why did technology increase by so much?  They increased in value, in part, because the market began to believe that we are near the end of increasing interest rates.  As a result, interest rates, in the bond market, declined:

  • US government 2-year treasury yield: Declined by -7.8% (from 4.41% yield to 4.10% yield).
  • US government 10-year treasury yield: Declined by -8% (from 3.88% yield to 3.55% yield).

When interest rates decline, the price of bonds will rise in value.  This is why we see gains in the bond indexes noted above (XBB, XIG, XHY) and this is also why we saw larger increases in the growth-oriented areas of the technology index.  When interest rates decline, valuation multiples may expand, which means that higher growth companies may see higher growth in their share price.

While at the same time, due to higher overall interest rates, and the concern that these higher rates will slow down the rate of growth of the economy, we saw very modest gains over the past three months in financials (XFN, +0.66%), energy (XEG, -5.43%) and health care (ZUH; +0.27%).  It is also interesting to note with the challenges seen with the smaller, regional U.S. banks, the overall U.S. banking index declined by -22.0% (ZUB) these past three months.

Looking back over the past 12 months we see the following returns:

  • Toronto Stock Exchange Composite Price Index: -8.18%.
  • Canadian Financial Index (XFN, the Canadian banks): -13.45%.
  • Canadian Real Estate Index (XRE): -17.50%
  • Canadian Bonds (the defensive side of the portfolio): -4.51%.
  • Nasdaq 100 Index (U.S. and global growth-oriented stocks): -11.17%.
  • The broad-based New York Composite Index (NYA): -7.77%.

By comparison, the NFC Tactical Asset Allocation Pool declined by -2.99%.

In January 2023 I noted some of the most significant declines over the past year (ending December 31, 2022) during a rising interest rate environment.   I’ve added to this table the three month returns (ending March 31, 2023, during a moderating / declining interest rate environment) as well as the overall returns for the past 12 months:

Table #1:  Recent Notable Returns for Technology Companies:

Source: https://ycharts.com.  Compiled by NPMC.

In Table #2 below we have shown the returns for different types of investments and market sectors by quarter and over the past 12 months.

Table #2:  Asset Class, Region and Sector Price Returns Over Past 4 Quarters and Last 12 Months.

Data Source: https://ycharts.com.  Data compiled by Nelson Portfolio Management Corp.

In summary, to put this past year into perspective:

  • In Canada, the bulk of the decline took place during the April to June, 2022 time period. Over the past nine months the Toronto Stock Exchange Composite price index has gained by +6.57%.
  • The broad Canadian Bond Index ETF (XBB) declined throughout 2022, but has seen a gain these past three months (+2.38%). Since June 30th, 2022, this index has gained by +1.75%.
  • The broad-based New York Stock Exchange Composite Index (NYA) declined by -7.77% over the past year, but since June 30th, 2022 has gained by 6.12%.
  • The Nasdaq 100 Index (NDX) declined by -11.17% over the past 12 months, but has increased in value by +14.58% since June 30th, 2022.

As a result, we can remain reasonably positive that the last nine months, while choppy, have generated some positive gains.

How Has the NFC Tactical Asset Allocation Pool Performed During This Time?

  • Over the past three months the NFC Tactical Asset Allocation Pool (the ‘Pool’) gained by +2.39%.
  • Over the past 12 months the Pool has declined by -2.99%.

Comparing against the figures mentioned above:

  • The growth component of the Pool gained in value by +3.919% over the past three months (vs. the S&P TSX Composite price index at +3.69% and vs. the New York Composite price index at +1.26%).
  • The growth component of the Pool gained in value by +7.554% over the past nine months, out-pacing the S&P TSX Composite price index (+6.57%) and the New York Composite price index (+6.12%).
  • The defensive component of the Pool gained in value by +1.44% over the past three months, under-performing the broad Canadian bond index (XBB at +2.38%).
  • The defensive component of the Pool gained in value by +4.535% over the past nine months, out- pacing the broad Canadian bond index (XBB, +1.75%).

The current asset mix of the Pool remains approximately 50% defensive and 50% growth, which is more aggressive than we were three months ago.  On December 31st, 2022, the cash component was 8.06% whereas today it is 4.3%.  On December 31st, 2022 the defensive component was 46.27% while today it is slightly less at 45.1%.  This means that we reduced the cash component and have added to the growth component.

We do not wish to reduce the defensive component at this time because of the high amount of return we expect to see from this component over the coming years. These are our expectations and are not a guarantee:

  • Individual corporate bonds: If we hold these bonds from today until when they mature, we expect to see an average annual return of approximately 6.6% to 8.34% per year.
  • Alternative strategy investments (private lending, private real estate, credit strategies): This is also currently yielding approximately 6.0% to 9.0% on average.
  • This means that we are expecting the defensive component of the Pool to consistently generate an average annual return of 6.5% to 7.5% per year over the next three to five years or more.
  • As a result, we have continued to add to these holdings, which is why the defensive component has increased from 30.50% (June 2021) to 45.1% (March 2023).

Table #3:  Historical Asset Mix of the NFC Tactical Asset Allocation Pool:  Source:  Croesus

We use the Pool returns because this will either represent 100% of your portfolio or approximately 60% of your portfolio and it is a good proxy for your overall portfolio returns depending on your fees and risk profile.

What have we been doing over the past few months?

The big story of the past several weeks has been the questions around the solvency of some of the U.S. regional banks, which has led to three smaller U.S. banks being acquired by rivals.  All of these crises seemed to start with Silicon Valley Bank Financial Group (‘SVB’ or ‘SVB Financial Group’).

SVB Financial Group:  Based in California, SVB was a specialty lender providing loans and financial services to start-up firms, private equity and venture capital firms.  For most of the past decade, their market capitalization was approximately $8 billion to $12 billion (Source:  YCharts).  Their market value spiked to as much as $45 billion at the end of 2021, coinciding with the large gains we saw in the Technology sector in 2021.  Since January 2022, the market value declined back down to previous levels of $18 billion as of February 2023.  At $18 billion, this is approximately 1/10th the market capitalization of the Royal Bank of Canada. Data Source: https://ycharts.com

What happened to SVB and other similar banks?  As mentioned above, when interest rates rise, the “valuation multiples” of higher growth technology stocks will typically decline.  If SVB loaned money to growth-oriented technology firms (their typical customer) in a lower interest rate environment when higher valuation levels can be justified, when interest rates go up and valuations go down, are the loans to these companies still “safe”?  Given the rapid increase in interest rates over the past 12 months (interest rates have increased by over 4.0%), you can see that this would impact a bank like SVB quite significantly.

At the same time, it is my understanding that SVB also invested a lot of their “depositors’ money” into longer term government bonds.  When interest rates increased over the past year, the value of these bonds would decline in value.  For example, if they had invested into a 20-year U.S. government bond, the value of this bond could have declined by as much 25% – 35% or more over the past year.  If SVB needed to cash in one of these bonds to manage their cash needs with their depositors, then the value of this bond is now repriced on their balance sheet.  The day before, the value of this bond, on their balance sheet, was at the original purchase price.  Yet today, the value of this bond on their balance sheet is now repriced at the current market value because they needed to sell some or all of this bond.  This means that their “solvency ratios” have now changed.   But this also means that they took in $100, for example, from their depositors and are obviously required to pay back to their depositors this same $100.  Yet, unfortunately for SVB, due to how this money was invested and due to the much higher interest rates today, and lower bond prices, they may only have $80.  They are required to repay their deposits at $100, but they only have $80.  This is a problem.

Other banks that had loans to growth-oriented technology firms were also impacted by these events, and one of them was one of our investments in a bank called First Republic Bank.

First Republic Bank (FRC):  This is a bank that has seen their annual revenue increase by +17% per year over the past 5 years and their earnings grow by +13% per year over this same period of time.  For the 10 years ending 2021, the share price grew by almost 20% per year.  We began to invest into FRC early in 2021 and we enjoyed very good growth during the year, triggering over $350,000 in realized gains.  2022 was a different year, where the share price declined by -40%.  Feeling that this was still a good investment, we added to our position throughout the year.  Even after this decline, the 10+ year average annual share price return was still +13% per year.  During the week of March 6th, 2023 as concerns around SVB, FRC and other regional banks gathered momentum, we exited our position.  In the days that followed the share price declined by an additional 90.0%.  So, the bad news is that our returns were impacted slightly due to the declines experienced with FRC (we estimate that this impacted our quarterly returns by approximately -0.35% overall).  In other words, with a return of +2.39% over the past three months, we estimate that the return could have been closer to +2.75%, had it not been for the decline we experienced with FRC. Had we not sold when we did, the returns for the quarter may have been only +1.6% instead of +2.39%.  The good news is that we sold when we did.

FRC is still a functioning bank, operating independently.  Their deposits have been back stopped by other major banks as well as the Federal Regulator, so the expectation is that they will be able to continue their operations.  We shall see how this story unfolds. Data Source: https://ycharts.com

Summary:  The big story this past month has been the impact of rising interest rates on stock valuations as well as bond prices, and how this 1 – 2 punch has put some financial institutions in a precarious situation.  For those firms, this has been somewhat of a perfect storm over a very short period of time.  This does not mean to me, in my opinion, that the overall banking sector in Canada or the U.S. is of any great concern.

So, what have we been doing over the past three months?

  • We have sold three positions (FRC and two Energy positions) and trimmed a third position (Energy).
  • We have made 40 new buys over the past three months, across 31 different companies. These buys are adding to our current positions, as the share prices begin to turn the corner and gather some upside growth momentum.
  • This is why the growth component of the Pool has grown from 46% to 50% over the past few months.

Where Do We Go From Here?

In January I wrote:  “Looking ahead markets expect to see two smaller interest rate increases of 0.25% each over the next three months (0.50% in total).”  This has now happened in the U.S., where in Canada there was only one increase of 0.25%.

In January I wrote:  “During this period of time, we believe that inflation and overall economic growth will continue to decline.  This will be both a positive and a negative.  As a positive, this means that interest rate increases may be on hold for the next several months but as a negative, if inflation is cooling and the economy is slowing, then stocks may also decline further in value”.  We are now in a waiting period.  Will the economic data and inflation continue to gradually slow down (which is what we want to see) OR will growth and inflation re-emerge in the coming months, thus requiring additional interest rate increases?  This is the question, and we really won’t know the answer until we see the data over the next several months.  This is the reason why we have positioned the Pool to be in a “neutral position”:  50% defensive and 50% growth.

In other words, to best position your portfolio during this uncertain period of time, we have taken a neutral stance:

  • We have increased the overall yield in the portfolio today, generating a 5.0% return on just the interest and dividends.
  • We continue to add to investments that we believe will do well over the next two to four years. With higher interest rates, values of many stocks have declined.  Thus, over the past three months we have made 40 additional buys, at lower share prices, which we believe will set us up well for the next 12 to 48 months.

If we see inflation decline and interest rates stabilize, technology stocks could continue to rally.  Alternatively, if we see the economy slow at a faster pace, then we could see economic sensitive areas continue to decline.

  • In the short term, we believe the downside risk is approximately -7.5%, which is nothing to be too concerned about.
  • If the selling momentum picks up beyond that, we could see further downside of an additional -10.0% – 12.0%.  Should we get close to this point, we will increase the defensiveness of your portfolio and the Pool.

Data Sources: https://ycharts.com Data compiled by Nelson Portfolio Management Corp. using pricing charts (technical analysis charts) within YCharts.

From our perspective, we need to just take this a few months at a time, as always:

  • Have a well-balanced, income-oriented portfolio: The yield within the NFC Tactical Asset Allocation Pool today is approximately 5.0%. (Data Source: Croesus Software)
  • Take advantage of the higher interest rates today available in individual bonds.
  • Diversify the portfolio into the private markets so as to gain a comparable return while potentially reducing volatility.
  • Own a diversified basket of well researched, well managed companies which we believe are typically below average valuations (relative to the overall market).
  • Maintain a reasonable cash position so as to take advantage of dips in prices when they occur.

Thank you for the continued opportunity to be of service to you.  Lynda and I are two Portfolio Managers that are now part of an overall team of 17 registered Portfolio Managers within the greater BCV Asset Management Inc. group.  We participate in the overall BCV Investment Committee and as such, are able to see the research and investments made by other Portfolio Managers.  This helps us have greater focus and confidence in everything that we own within our portfolios.  The BCV Asset Management Inc. group now has over $4.5 billion in Assets Under Management (AUM).

Should you have any questions, please reach out to myself (dnelson@nelsonfinancial.ca) or Lynda Harris, Portfolio Manager (lharris@nelsonfinancial.ca ).  If you wish to book an appointment for a portfolio review, please connect with Linzy Dumontier (ldumontier@nelsonfinancial.ca) and should you have any administrative questions or needs, please contact Jennifer Johnston (jjohnston@nelsonfinancial.ca).

All the best!



  • 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 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."