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 September 30th, 2017. Market and index returns noted below are for the period ending September 29th, 2017. Market Statistics: Source: https://ca.finance.yahoo.com.

  • The Toronto Stock Exchange peaked most recently on February 21, 2017. Since then the index has declined by approximately -1.8%. Since January 1 the market return has been only slightly positive (+2.27%). The 12 month return is approximately +6.44%. The bulk of this return was generated from October 1, 2016 through to January 25th, 2017 (The Toronto Stock Exchange today is at the same level as it was on January 25th).
  • Since the last report, the Toronto Stock Exchange had been flat for most of the summer. The market index return from July 1 through to September 15th was zero. Yet, over the past two weeks the markets have rallied, resulting in a gain of +2.06% for the quarter.
  • Similar patterns can be seen with all three of the major components of the Toronto Stock Exchange. Financials (symbol: XFN) were flat from June 30th through to September 15th, but posted a gain for the quarter of +3.95%. Energy (symbol: XEG) stocks were flat from June 30th to September 11th, but as a result of some of the hurricane damage in Texas, energy has surged to post a positive gain for the quarter of +10.19%. Yes, a 10% gain in the past two weeks! Finally, the materials sector (symbol: XMA) was a different story for most of the summer. From June 30th through to September 1 this sector had seen a significant gain of +7.4%. Yet, since September 1 we have seen this sector decline by 4%, resulting in a gain of zero percent dating back to June 23rd, 2017.
  • The real estate sector (symbol: XRE) was down by -2.57% while the technology sector (symbol: XIT) was flat between June 30th and September 26th.
  • Since the last report, the S&P 500 (the 500 largest companies in the United States) increased in value by +3.32%. One of the largest contributors to this gain were US banking stocks (symbol: ZUB: +8.30%) primarily due to rising interest rates. As interest rates rise, banking stocks typically do well.
  • But the really big story with the US markets has been the US dollar. Over the past 3 months the Canadian dollar produced a positive gain of +6.32%. This means that the actual return of US stocks, in Canadian dollars, was -3% for the past three months.
  • Globally we have continued to see very good performance out of Europe and Asia. Since the last report the Europe / Asia / Far East Index (Symbol: EFA) has increased in value by 5.13% and the BRIC Index (Brazil, Russia, India and China; symbol CBQ) has increased in value by 17%. The 12 month returns for EFA and CBQ are +15.45% and +25.1% respectively, both of which out-performed the Canadian market over the past year. Given the size of these gains, are we getting close to seeing a correction?
  • IShares Global Industrials Exchange Traded Fund (Symbol: XGI): One of the global exchange traded funds that we have been adding to over the past year is XGI. We believed that this would perform well in a growing global economy. Over the past 3 months XGI has increased in value by 3.6%. Over the past 12 months XGI has increased in value by 21%. This has been a good holding for us.

As per other reports, here is a table showing the most recent returns by sector and market.

Table 1: Historical Returns for Winter 2017 (January 1 to March 31, 2017) vs. Spring 2017 (April 1 to June 23, 2017) vs. Summer 2017 (June 23 to September 29th, 2017) vs. the Last 12 Months (October 1, 2016 to September 29th, 2017). Market Returns Source: ca.finance.yahoo.com. NFC Tactical Asset Allocation Pool source: Croesus software. The industry standard rate of return disclosure of 3, 6, 9 and 12 months is illustrated on your client specific investment statement. The time periods selected for the tables in this report were chosen so as to illustrate recent changes in the markets and with different types of investments.

If you have any questions or comments about these figures, please send me your thoughts.

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

  • Since the last report, the NFC Tactical Asset Allocation pool has increased in value by only 0.32%. By comparison to the Toronto Stock Exchange Index, the pool has increased in value by 0.32% while the TSX has increased by 2.06%.
  • If we break this down into the June 30th to September 14th period, the NFC Tactical Asset Allocation Pool declined in value by -0.70% while the TSX was flat. From September 15th to 29th, the NFC Tactical Pool gained in value by 1.64% while the TSX increased in value by 3%. The NFC Tactical Pool underperformed during these time periods because i) I was increasing the cash allocation in the pool, striving to be more defensive as the concerns over North Korea climbed, while ii) the Canadian dollar was rising thus negatively impacting our returns on our US and global investments.
  • Year to Date: From January 1 through to September 29th, 2017, the pool has gained in value by approximately 3.44% (vs. the TSX at +2.27%).
  • Over the past 12 months the NFC Tactical Asset Allocation Pool has increased in value by approximately 6.26%, while the Toronto Stock Exchange index has increased in value by 6.44%.
  • In general, we talk about striving to capture 70% of the upside of the market while protecting against 70% of the downside of the market over time. With this in mind, 70% of the TSX return over the past 12 months is 4.51% (70% X 6.44% = 4.51%) vs. the pool return of +6.26%. The pool has done well over the past 12 months, despite the under-performance over the past three months.
  • In July we received from Fundata (www.fundata.com) the June 30th detailed analysis report on the pool. At that time, for the 3 years ending June 30th, 2017, the pool had the 20th highest return and the 17th lowest level of volatility, measured against 146 other Neutral Balanced Funds available to Canadian investors in Canada. We receive this report on a quarterly basis. This means that the pool was ranked in the top 14% of this peer class over the past 3 years. We are very proud of these very significant results, both in terms of investment return but also risk management.

What Have We Been Up To Over The Past Several Months?

  • When North Korea fired a missile over Japan on August 29th, at that time I felt that the world dynamic had begun to change and that risks were definitely moving higher. A second missile flew over Japan on September 15th. Since then the rhetoric between the US and North Korea has grown exponentially.
  • When this type of situation arises, what do you do? Do you ignore it, believing that this will never escalate into something? Yet, if it does, and the markets respond with a significant drop in value, then hindsight would suggest that it would have been prudent to be more defensive.
  • As a result of these increased tensions, I made the decision to begin to tilt the portfolios toward a more defensive approach. The defensive component in the NFC Tactical Pool has increased by 43% of the portfolio to 48%. This means that we have increased the defensive component by close to 12% (ie: a 5% change from 43% to 48% is a 12% increase from the 43% level).
  • To make the NFC Tactical Asset Allocation pool more defensive, I have a) trimmed some of the equity positions and increased the amount of cash, b) added the volatility index so that this investment would rise in value if other securities dropped in value and c) I have looked at some of our larger holdings and have added tight stop loss orders to these securities so that we would be quick to exit positions during times of uncertainty.
  • In all client accounts, I also trimmed half the allocation to three of our core equity holdings: Horizon’s Seasonal Rotation ETF (HAC), Horizon’s Canadian Dividend ETF (HAL) and the Horizon’s Global Dividend ETF (HAZ). Again, the purpose was to take a pre-emptive defensive stance in the event that things became more uncertain with North Korea this fall.
  • However, at the same time as I was tilting to a more defensive stance, the markets have been very robust these past two weeks. Will this continue?
  • We are seeing more and more analysis suggesting that markets are valued at their third highest level in history. This valuation, combined with the uncertainty over North Korea, and things like the US tax proposals and the renegotiation of NAFTA, all suggest to me that there is considerable uncertainty in the markets today. If NAFTA falls apart, or if the US is unable to get its tax reform program into place, will these markets decline in value?
  • It is for reasons such as these that I felt it was prudent to reduce the risk level in the NFC Tactical Asset Allocation pool as well as in client accounts.

Changes have been made to the NFC Tactical Asset Allocation Pool?

  • Table 2 below illustrates the changes to the overall asset mix of the pool, over the past 2 years. Note that the pool is currently closer to being a neutral allocation (48% defensive, 52% growth), more defensive than it has been for the past 15 months.
  • Table 2 also illustrates the geographic weighting. You will notice how the Canadian exposure has recently increased as I have increased the cash component of the pool. Today the Canadian exposure is approximately 75% whereas in June it was closer to 71%. 12 months ago the Canadian exposure was 80%. Over the past 12 months the US exposure has increased from 15% to 20%, but the rise in the value of the Canadian dollar has temporarily reduced the returns on these investments. The change in global asset mix has been a positive contributor to the performance of the pool, but the currency moves have offset some of these gains on the short term.

 Table 2: NFC Tactical Asset Allocation Pool: Asset Mix for the period ending as displayed. Source: Croesus Software.

Where Do We Go From Here?

Today the markets look to be strong with many positive trends in place. This is good! The summer months were quite typical in that little to no gains were achieved until approximately 2 weeks ago. So after a summer of zero returns, it makes sense that we would begin to see some growth. Combining this with the hope that US tax reform is positive for the markets and we could see markets continuing to rise from here.

Alternatively, it is hard to ignore the current valuation levels and other external, unpredictable areas such as the rising uncertainty relating to North Korea. If we ignore North Korea, we may do very well if markets continue to rise. Alternatively, with the high market valuations in place, if there is an unexpected event could see a 10% to 20% market correction come quickly?

So what’s the best approach in a time like this?

We won’t know the answer to this question for several months, but it is my preference to err on the side of caution by a) increasing our cash holdings, b) adding some volatility protection, c) adding additional stop loss orders on some of our larger holdings and d) tightening up some of our stop levels so that we are able to more quickly exit positions should markets become uncertain, especially if this uncertainty occurs while markets are closed.

If markets continue to rise this will mean that we will likely under-perform during this period of time. Alternatively, if there is a correction, I feel that we are already well positioned to protect from such an event.

So at this time we continue to take things one week at a time. If we see some of these various risk factors decline, then we will repurchase the equity positions (HAC, HAL, HAZ) that were sold out of the client accounts and invest the cash into areas that we see as having good value.

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!

"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."