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. and Lynda Harris, Portfolio Manager, Nelson Portfolio Management Corp. as of January 3rd, 2024.  The market and index returns noted below are based on the price changes for each quoted item for the period ending December 31st, 2023.  Throughout this report, whenever 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 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.  Market Statistics:  Source: https://ycharts.com

Market returns from October 1, 2023 through to December 31st, 2023:

  • Over the past three months, the Toronto Stock Exchange Composite Price Index (TSX) gained by +7.25%, driven mostly by gains in financials (XFN; +11.19%), Technology (XIT; +18.62%), Utilities (XUT; +6.72%) and Real Estate (XRE; +7.47%). The only sector in Canada that declined over the past three months was Energy (XEG; -9.8%).
  • In the U.S., the broad-based New York Stock Exchange Composite Index (NYA; +9.45%) also gained in value over the past three months, as did the S&P 500 Index (SPX; +11.24%) and the Nasdaq 100 Index (NDX; +14.34%). Over the past three months, similar to our Canadian returns, all sectors gained in value except for the Energy sector.
  • Internationally, the Europe / Asia index (EFA) gained by +9.33% and the Emerging Markets (XEM) gained by +3.33%.
  • Defensive investments, such as the broad Canadian Bond Index (XBB; +7.42%), also generated positive returns these past three months. We see a similar gains for U.S. corporate bonds (XIG; +8.07%), U.S. high yield bonds (XHY; +5.11%) as well as North American preferred shares (XPF; +4.41%).

The Gains of 2023 Offset the Declines Of 2022:  The last three months we saw gains in both the equity markets and the bond markets.  This is exactly the opposite of what we saw in 2022, when both stocks and bonds declined.  Last year at this time we were talking about how both stocks and bonds declined due to rising interest rates.  In 2022, a “Balanced Growth” portfolio declined in value by approximately -9.82%.  Since late October 2023, we have seen the opposite: interest rates declining, which in turn has seen an increase in the value of both stocks and bonds.  In 2023, the same “Balanced Growth” portfolio gained in value by +10.2%.  In other words, we have now mostly recovered from the declines seen in 2022 where the gains of 2023 have now mostly offset the declines of 2022.

This means that the two year returns for a typical Balanced Growth portfolio is -0.62% in total (-0.31% per year).  By comparison, the NFC Tactical Asset Allocation Pool (the ‘Pool’), gained in value by +0.53% per year, over this two-year period of time.  Note:  In this example I am defining a Balanced Growth portfolio as 40% Canadian Bonds (XBB), 30% Canadian Stocks (XIC), 20% New York Composite Index (NYA) and 10% Europe / Asia (EFA), which also do not take into account the effect of fees into the performance.

Table #1:  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.

To put the last 12 months into perspective (ending December 31st, 2023):

  • In Canada, the S&P / TSX Composite price index gained by +8.12% driven mostly by gains in the Financials sector (XFN; +8.82%) and the Technology sector (XIT; +55.0%). When interest rates decline, growth stocks (such as those in the Technology sector) can see higher gains.  The gains in the Canadian market were however reduced by the declines in Canadian Energy (XEG; -0.86%), Real Estate (XRE; -2.06%) and Utilities (XUT; -6.1%).  In the Canadian Technology sector, we own two companies:  Constellation Software (CSU; +55%) and Open Text Software (OTEX; +38%).  In the Energy Sector we own Canadian Natural Resources (CNQ; +10.92%), Suncor (SU; -1.16%), Topaz Energy (TPZ; -8.28%), Tourmaline (TOU; -12.78% and Parkland Corp. (PKI; +43.0%).
  • The broad Canadian Bond Index ETF (XBB; +3.37%) generated a positive return over the past 12 months while other defensive areas, such as U.S. corporate bonds and preferred shares, also saw small gains overall.
  • The broad-based New York Stock Exchange Composite Index (NYA) gained by +10.99% over the past year while the Nasdaq 100 Index (NDX) gained by +53.81%. This shows the difference between overall market gains (NYA) vs. the more technology-oriented bias of the Nasdaq 100 index (NDX).  Some our largest U.S. equity gains over the past 12 months include:  Advanced Micro Devices (AMD; +111.0%), Alphabet (GOOGL; +53.0%), Amazon (AMZ; +75.0%), Applied Materials (AMAT; +57.0%), Novo Nordisk (NVO; +49.0%) and Nvidia (NVDA; +227.0%).

To summarize, 2023 turned out to be the opposite of 2022.  In 2022 we saw declines throughout the stock and bond markets due to rising interest rates while in 2023 we saw gains in the stock and bond markets (beginning in late October 2023) due to falling interest rates.  To clarify, the declining interest rates we saw in 2023 occurred at the longer end of the yield curve, where the 10-year interest rate on government bonds declined from approximately 5.0% per year down to under 4.0% per year.  This is a very, very large change in the long-term rate, which suggests that “the market” believes that the central bank (in Canada and in the U.S.) is likely going to reduce short term interest rates sometime in 2024.

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

  • Over the past three months the Pool gained in value with a return of +5.713% (vs. the TSX Composite Total Return Index at +8.10%).
  • Over the past 12 months, since January 1, 2023, the Pool gained by +9.457% (vs. the TSX Composite Total Return Index at +11.75%).
  • 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 11.75% = 8.22%.
  • This means to us that the Pool return (+9.457%) captured 80.5% upside of the return of the S&P TSX Composite Total Return Index (+11.75%).

Over the past three years (ending September 30th, 2023), the Pool achieved the 4th highest return compared to 128 other similar neutral balanced funds in Canada, with the 7th lowest level of volatility. (Source:  Quarterly Performance Analysis Report, Fundata Canada Inc.).  Similar to our June 30th, 2023 results, no other fund in this analysis generated a higher return with the same level of volatility for this time period.  This is excellent!

Table #2:  3 Year Historical Risk & Return Ranking: NFC Tactical Asset Allocation Pool (Class A)

Source:  Fundata Canada Inc.

Digging a little deeper, over the past 12 months:

  • Since January 1st, 2023, the growth component of the Pool gained in value by +13.82% (vs. the S&P TSX Composite Total Return Index at +11.75% and vs. the New York Composite Total Return Index at +13.77%).
  • Since January 1st, 2023, the defensive component of the Pool gained in value by +11.79% in outpacing the broad Canadian Bond Index (XBB: +6.64%).
  • Both the growth component and the defensive component of the Pool outperformed relative to these broad indexes in 2023. It has been a good year for us.

The current asset mix of the Pool is approximately 46% defensive and 54% growth, therefore tilted more towards growth today than in the last two years.  On December 30th, 2022, the cash component was 8.06% whereas today it is just less than 1.0%.  A year ago, the defensive component was 54% while today it is less at 46%.

We have moved the Pool more towards growth in the past 3 months with additional cash from new deposits being allocated to equities (the Pool has now surpassed $100 million in assets).  We had one bond mature in November 2023 (Ford Credit) to which we used some of the proceeds for equities. While we have lessened the percentage of the defensive component overall, we have kept the securities the same with our existing bond ladder while adding to the Preferred Shares and the private lending space.  In the defensive component of the Pool, expected future returns remain in the 6% to 7.5% per year range.

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 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% – 4.5% annually and yet is invested today in a neutral – balanced manner.    This is good!

What have we been doing over the past few months?

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

  • Equity Sells: We executed eight sell orders, so as to i) take profit on positions that looked like further declines were due to occur in the near future and ii) exited positions where we wanted to realize a capital loss for tax purposes or utilize the funds for opportunities where we wished to top up or add new positions. (Exited positions: CVS, DG, MG, NTR and XBM – Global Base Metals ETF.)
  • Equity Buys: We executed 15 buy orders in the last three months topping up current positions in companies such as Sherwin-Williams (SHW, 12 month return +31.0%), Cintas (CTAS, 12 month return +33.0%) and Amphenol Corp (APH, 12 month return +30.0%).
  • Increasing Exposure to the Private Markets: As mentioned in other quarterly market commentaries, we have exposure to the private markets which now exceed and estimated $18 trillion in market cap consisting of exposure to private lending, private real estate, private infrastructure, and private equity. Source: https://caia.org
  • This past quarter we added the Peakhill Income Opportunity Fund in the short-term mortgage area with a focus on multifamily and commercial property types. This company is an approved CMHC lender where 70% of the mortgage portfolio is a bridge to CMHC loans. This means that they provide short term mortgages while CMHC is underwriting a conventional mortgage, then the mortgage is paid out. This fund provides geographical diversity across Canada with a larger focus in Ontario. The Peakhill Income Opportunity Fund (Peakhill Capital)  provides a targeted net return in the 8.0% – 9.0% range.
  • Preferred Share Buys: We have also continued to add to our preferred share holdings, adding new preferred shares of Sun Life Financial Inc. (SLF.PR.D) and Great-West Lifeco Inc. (GWO.PR.I), which pay annual dividends today in the 6.10% to 6.50% range and we believe have upside growth potential of 40.0% +.
  • Our largest declining holding in our portfolio this past year was Dollar General (DG), with a decline of –55.0%, where most of this decline took place over just a three-month period of time. We decided to exit this position in October, believing that this is not a market or sector issue, but rather a management team issue (i.e. we lost confidence in the management team of Dollar General).  We have other exposure to Consumer Staples such as Walmart, Costco, Pepsi, and Alimentation Couche-Tard that we have seen gains in over this past year (Costco; COST, +19.0%; Walmart, WMT, +23.4%; Pepsico, PEP, +6.0%; Alimentation Couche-Tarde, ATD, +25.0%).

Summary:  Over the past 12 months, the Pool’s assets under management have continued to increase, due to both returns and new deposits, from $82 million to $100 million at the end of December 2023.  With these increased deposits, we have added more to growth-oriented investments and some to defensive investments.  We have tilted the Pool slightly more towards growth and today have an asset allocation that is 54% growth oriented and 46% defensive. Comparatively, at the end of June 2023, we were 50% growth oriented and 50% defensive.  The Pool is generating a yield exceeding 4%, which we believe provides an excellent foundation for future total returns.

Where Do We Go from Here?

2022 was a year of increasing interest rates, falling stock prices and falling bond prices (see Table #1 below).  This is like a pendulum that moves to the right.

From October 2023 to today, interest rates declined, resulting in rising stock prices, and rising bond prices (see Table #2 below).  This is like a pendulum that is now swinging in the opposite direction.

The question today becomes: Will the pendulum continue to move in the same direction, with investment values moving higher, or will interest rates move higher (or stay higher), keeping investment values muted for the months to come?

That is the question.

The charts below shows the relationship between the 10-year U.S. treasury bond rate (purple line) vs. the New York Composite Index (gold line) for both 2022 and 2023.

Chart #1:  2022:                                                            Chart #2:  2023:

In general, we can see an inverse pattern that shows us that when the purple line is rising (long term interest rates), the gold line (stock prices) is falling and when the purple line is falling (long term interest rates) the gold line (stock prices) tends to rise.

Today the expectation is that the economy will continue to slow into 2024.  This is both good and bad.  As the economy slows, so too does inflation, which has been the biggest issue of concern over the past few years.  This is good!  But as the economy slows, central banks want to make sure that we don’t begin to drift into a recession.  A recession can sometimes not be good for the equity markets.

To reduce this risk, central banks have historically reduced short-term interest rates.  Next year the expectation is that short-term interest rates will be cut by 1% to 1.25%.  Interest rate cuts can be good for both stocks and bonds, as we see in the charts above.  This is good!

But the impact of an interest rate cut in the economy may not be felt for several months down the road.  In the meantime, stock prices could go down further.  This is not so good.

With this being said, 2024 may be similar to 2023.  We may see periods of time where markets are choppy, but in the end move higher.  It is our view today that we want to err on the upside.  We want to assume that the economy will remain resilient, unemployment will remain low and that corporate profits and the consumer will both remain generally positive. So, our view remains generally more optimistic, looking for opportunities to add to our equity holdings when it is prudent to do so.  In other words, we want to buy on the dips and continue to add to growth-oriented investments, particularly in the U.S.  So, while over the past 18 months we have been adding to our defensive positions, to lock in higher, longer-term yields, looking ahead, our current plans are that we will want to be adding to our equity positions.

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).

All the best for a joyful and abundant 2024!

Doug & Lynda


  • 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.