Quarterly Market Commentary
as of December 31, 2024

Commentary
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. and Lynda Harris, Portfolio Manager, Nelson Portfolio Management Corp. as of October 2nd, 2024. The market and index returns noted below are based on the price changes for each quoted item for the period ending Monday, September 30th, 2024, unless stated otherwise. Throughout this report, whenever I / we reference a specific market or sector, we use the data from a specific Exchange Traded Fund (ETF) that is meant to mirror the returns of the index. When I / we do this, we are sharing with you the Symbol of that ETF so that you can do your own research and can mirror some of the analysis that we have done. When we reference returns throughout this report, we are quoting all index returns as total returns which include both capital gains as well as any cash distributions, such as dividends or interest unless otherwise noted. Market Statistics: Source: https://ycharts.com
Market returns from July 1st, 2024, through to September 30th, 2024:
- Over the past three months, the Toronto Stock Exchange Composite Total Return Index (TSX) gained a solid +10.54%, driven mostly by advances in Financials (XFN; +16.77%), Materials (XMA; +11.98%), Utilities (XUT; +16%) and Real Estate (XRE; +23%). All of these sectors performed well due to the reduction of short-term interest rates in Canada over the past 3 months. Gold gained in value by +13% over the past 3 months, also partially due to the interest rate cuts. The gain in gold contributed to the gain in the Materials Index (XMA). The worst performing sector was Energy (XEG; -6.24%).
- In the U.S., the broad-based New York Stock Exchange Composite Total Return Index (NYA; +8.83%) also gained over the past three months while the Technology sector drove most of the declines: Microsoft (MSFT; -3.83%), Alphabet (GOOGL; -8.83%), Amazon (AMZN; -3.58%) and the Semiconductor Index (SOXX; -6.28%).
- While the Technology sector declined in value over the summer, we did start to see the overall market broaden, which is really important. For example, the “market weight index” (S&P 500 Total Return Index, SPX) gained by +5.89% while the “equal weight index” (S&P 500 Equal Weight Index; RSP) gained by +9.6%. This tells us that more companies participated in the upward direction of the market, which is important for the market to continue to climb in value.
- Internationally, the Europe / Asia Index (EFA) gained by +6.77% and the Emerging Markets Index (XEM) gained by +6.26%.
- Over the past three months the defensive investments mostly increased in value, such as the broad Core Canadian Universe Bond Index (XBB; +4.44%), the U.S. High Yield Bond Index (XHY; +6.12%) and the North American Preferred Stock Index (XPF; +6.41%). These gained in value also mostly because of the decline in short term interest rates. The Bank of Canada cut the short-term rate by -0.75% over the past four months.
Over the past three months, markets have moved higher primarily due to the cut in interest rates. When rates go down, interest sensitive investments such as Utilities, Real Estate, Bonds, Preferred Shares and Gold can see some larger gains. Interest rate reductions also help with the repricing of growth stocks, which could then lead to stronger overall stock market gains over the fall and winter months.
Table #1: Asset Class, Region and Sector Total Returns Over Past 4 Quarters and Last 12 Months
Data Source: https://ycharts.com. Data compiled by Nelson Portfolio Management Corp.
To put the last 12 months (ending September 30th, 2024), and the last few years, into perspective:
- The current upward trend began last October 1st, 2023, and has been quite consistent throughout the year. In Table #1 above we see the S&P TSX Composite Index with gains of +10.54% over the past three months, +6.62% during the winter months and +8.1% over the October to December months in 2023. This has led to a 12-month total return gain of +26.75% where close to 40% of this gain took place this past summer due mostly to the recent interest rate cuts.
- We see similar returns in the United States with a 12 month gain of +29.65% for the broad-based New York Composite Index and a +49% gain in the U.S. banking sector.
- In Chart #1 below you can see that the S&P TSX Composite Index (in Canada) was mostly sideways from November 2021 through to March 2024. However, the current market rally began in October 2023 and continues to this day.
- In Chart #2 below you can see that the current market uptrend is well intact as we enter the positive seasonality of the October through May time period.
Chart #1: S&P TSX Composite Index: September 2021 to September 2024 (3 years):
Chart #2: S&P TSX Composite Index: October 1, 2019 to October 1, 2024 (5 years):
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 in value with a return of +3.674% (vs. the TSX Composite Total Return Index at +10.54%).
- Over the past 12 months, since October 1st, 2023, the Pool gained by +19.375% (vs. the TSX Composite Index at +26.74%).
- As a balanced investment pool, our goal has been to generate a return greater than 70% of the return of the TSX Composite Total Return Index: 70% X 26.74% = 18.718%.
- This means to us that the Pool return (+19.375%) captured 73% of the upside of the return of the S&P TSX Composite Total Return Index.
Over the past three years (ending June 30th , 2024), the Pool achieved the 6th highest return compared to 123 other similar neutral balanced funds in Canada, with the 9th lowest level of volatility. (Source: Quarterly Performance Analysis Report, Fundata Canada Inc.). No other fund in this analysis generated a higher return with the same level of volatility for this time period.
Digging a little deeper, over the past 12 months:
- The growth component of the Pool (equities) gained in value by +29.97% (vs. the TSX Composite Index at +26.74% and the New York Composite Index at +29.65%). Our largest 12-month gains have been from Progressive Insurance Corp. (PGR, +83%), Cintas Corp (CTAS, +72%), CIBC (CM, +66.8%) and Costco (COST, +60.273%) while the lowest returns came from our energy sector holdings such as Tourmaline (TOU, -0.28%) and Canadian Natural Resources (CNQ, +7%).
- The defensive component of the Pool gained by +26.71%, far outpacing the broad Core Canadian Universe Bond Index (XBB, +12.62%). As interest rates declined, the market value of our individual bond holdings increased significantly, with the 12-month returns of several bonds gaining by over +30.0%.
- Over the past three months, however, the growth component of the Pool (equities) gained by only 5.229% (vs. the TSX Composite Index at +10.54%). We underperformed during this time due to larger declines with companies such as Novo Nordisk (-17.7%), Lumine Group (-14.43%) and Alphabet (GOOGL; -10.0%). The valuations of these companies had become higher, and these declines brought them back down to their current trendlines (See chart #3 below).
Our relative under-performance over the past three months is not a concern to us at this time as this is representative of many securities simply trading back down to their current trendlines.
Chart #3: 5 Year Chart of Alphabet (GOOGL) with the red arrow showing the declines of the last 3 months:
The current asset mix of the Pool remains at approximately 44% defensive and 56% growth; therefore, we continue to be tilted more towards growth today.
This is slightly more growth oriented than where the asset mix was 12 months ago. This time last year the Pool was 2% cash, 46% defensive and 54% growth vs. the 2% cash, 43% defensive and 55% growth position today.
Table #3: Historical Asset Mix of the NFC Tactical Asset Allocation Pool: Source: Croesus
Note: We reference the Pool returns throughout this document because the Pool will either represent 100% of your portfolio or approximately 40% to 60% of your portfolio and it is a good proxy for your overall portfolio returns depending on your fees and risk profile.
In summary, the core of your portfolio, the Pool, has performed well over the past three and 12 months, is generating a total distribution (interest and dividends) of approximately 4% annually and yet is invested today in a neutral – balanced manner.
What have we been doing over the past few months?
So, what have we been doing over the past three months?
- Equity Sells: Over the past three months in the Pool, we executed 10 sell orders where we exited eight positions either to protect the downside or deploy money into other sectors or securities where we see more positive trends and growth potential.
- We exited Suncor (SU) and Topaz Energy (TPZ) so as to reduce our overall energy weight and to protect against further downside while we are in the weak part of the seasonal cycle for energy. We continue to hold Tourmaline (TOU, natural gas) and Canadian Natural Resources (CNQ) and a broad-based energy ETF as a trading position.
- We reduced our exposure to the individual semiconductor stocks in favour of more broad-based exposure to the overall semiconductor sector. We exited our positions in Nvidia (NVDA), Applied Materials (AMAT) and Advanced Micro Devices (AMD) and used these proceeds to add to the iShares Semiconductor ETF (SOXX).
- Parkland Corp (PKI): Parkland Corp. is the owner / operator of a number of gas station and convenience store brands. We quite like this company, but the market seems less enamored. The stock has been in a consistent downtrend since February, has broken through its trendlines and seems to have the potential for moving lower still. We exited this position completely, but we still own some of their bonds.
- Equity Buys: We executed 23 buy orders in the last three months:
- Stella Jones (SJ): We added one new equity position in the past three months. Stella Jones (SJ) is a Canadian company that is a leading North American manufacturer of pressure treated wood products with facilities across Canada and the United States. The products are used for utility poles, railway ties other industrial uses and residential lumber. This expands our exposure in the Materials sector. Stella Jones has good long term growth potential with the need for replacing aging utility poles and has long term contracts with railroad carriers in North America. The 12-month return is +44.05%, the 3-year return is +31.21% per year, and the 5-year return is +20.63% per year.
- Topping Up Current Positions: As markets can be quite choppy throughout the summer months, we like to use this opportunity to top up holdings that have seen recent declines. We topped up 12 different equity holdings over the summer months.
- One of our more significant buys was to top up our holding in the Granite Real Estate Investment Trust (GRT.UN, 12 month return +19%). As interest rates are reduced, certain sectors may perform well such as Real Estate, Utilities and Financials so we have added to some of our real estate holdings. We also added to one of our U.S. based industrial real estate holdings (Prologis, PLD, 12-month return +17%).
- With the sale of Suncor (SU), we topped up our allocation to Canadian Natural Resources (CNQ).
- With the choppiness of the semiconductor sector, we took profit on several of our individual holdings and then deployed the proceeds into a broader exposure of this sector with the iShares Semiconductor Index (SOXX).
- Private Markets: This past quarter we added an additional allocation to the Equiton Residential Income Fund. Our initial investment was made in June 2024. We sold our position in the Alitis Mortgage Fund and used the proceeds to continue to build our position in Equiton. This fund specializes in owning multi-family residential real estate properties and provides a targeted net return in the 8.0% – 12.0% range
Summary: Over the past 12 months, the Pool’s assets under management have continued to increase, due to both returns and new deposits, from $95 million in October 2023 to $117 million at the end of September 2024. With these increased deposits, we have added more to growth-oriented investments and some to defensive / income-oriented investments. We have tilted the Pool slightly more towards growth and today have an asset allocation that is 56% growth oriented and 44% defensive. Comparatively, at the end of September 2023, we were 52% growth oriented and 48% defensive. The Pool is generating a yield exceeding 4%, which provides a consistent foundation for future total returns.
Where Do We Go from Here?
Inflation in both Canada and the U.S. continues to decline. This is good!
In August 2023, the U.S. annual inflation rate was 3.67% while today, 13 months later, the annual inflation rate is now 2.53%. Interest rates in the U.S. have started to decline as of September where today it is approximately 5%. In Canada, in August 2023 the annual inflation rate was 4% while today it is 1.95%. The ideal annual inflation target is 2%. It is for these reasons that the Bank of Canada has reduced interest rates by 0.75% since April, from 5% down to 4.25%. Many expect these rates to continue to decline, perhaps by as much as an additional 1% or more.
At this point, much of the worries from this past spring now appear to be behind us where both inflation and interest rates have started to decline and are expected to continue. This is positive for interest sensitive investments such as bonds, preferred shares, real estate trusts and utilities. Lower interest rates may also impact stock valuations by pushing up the valuation of some of the more growth-oriented stocks.
Overall, stock markets are still in an upward trend (See Chart #2 above), the economy remains strong, and unemployment remains relatively low, we continue to see strong job growth and consumer spending also remains positive. This should be a positive environment for stocks.
However, two areas that could disrupt this growth path are i) the number of labour disputes / strikes taking place at this time and the impact that higher wages may have on wage inflation and ii) the international conflicts in the Middle East and Ukraine. Hopefully, things don’t get any worse than they currently are.
To find the balance against these risks, we are in the process of adding two additional holdings to the defensive Alternatives area in the Pool, each with the potential to earn 8% to 12% annualized returns over the coming years. These are defensive holdings in that they are not subject to typical stock market volatility yet can earn consistent returns. We continue to be well balanced but with a tilt towards growth. This seems to be serving us well as you can see from our performance over the past year, and we don’t anticipate any change to our current strategy.
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 Riley Chard (rchard@nelsonfinancial.ca) and should you have any administrative questions or needs, please contact Jennifer Johnston (jjohnston@nelsonfinancial.ca).
Thank you for the opportunity to do this important work for you. All the best!
Doug & Lynda
Announcements:
- 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 you with 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."