As we close the year, we will take the next few weeks to reflect on what was a wild and volatile 2023. To do so, we’ll look at key charts along the way and provide some commentary and context on this past year’s performance. Of note, given the timing of the holiday season, there will not be a newsletter next week.
As a starting point, it felt like a difficult year in the market, given the rollercoaster of a ride. That said, we can now say that the U.S. and Canadian indices are out of bear market territory. A bear market is traditionally defined as a 20% drawdown. If you look at the chart below, you’ll see that we exited bear territory and are within striking distance of all-time highs. One look at the chart below, and you’ll also notice that the TSX Composite Index has been far more volatile this year, with several peaks and valleys. Only recently has the S&P 500 begun outperforming the TSX, largely due to the pullback in energy stocks.
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Which sectors led the charge? To no one’s surprise, technology led the way south of the border. Now, you might be surprised to see the communication sector keeping pace with tech, especially considering the difficult year among telecoms. However, it is important to remember that a few years ago, there were some changes to the sectors to ensure more balance. Some tech companies, such as Alphabet (GOOG) and Meta (META), are no longer classified as tech companies and are now considered communication companies. Considering both of those were among the Mag 7 (more on that later), it is not surprising to see that sector outperform.
Looking at the laggers (4 of 11 sectors were in negative territory), the utilities sector brought up the rear. Once again, it is not all that surprising as it is one of the most negatively impacted by a high interest rate environment.
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What does it look like here in Canada? For starters, we don’t have the whole basket of ETFs like the U.S., so we just ran the report on the performance of the indices.
The first thing that stands out is that the technology sector obliterated every other sector significantly. It was the ONLY sector to achieve double-digit returns. On the flip side, unlike the S&P 500, the communications sector was one of the worst performing. The reason is simple: Canada’s ‘version’ of this sector is dominated by telcos, which had a tough year. Furthermore, it has few notable tech companies that made the switch from the technology sector. Not surprisingly, the worst-performing sector was once again utilities.
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If you have been with us for the year, no doubt you will have heard us talk at some point about how the market gains owe their success in large part to a limited number of companies. To illustrate, below is a chart of the “Magnificent Seven,” sometimes referred to as the “S&P 7.” They are the 7 largest stocks by market cap in the U.S., which make up ~29% of the total market cap of all companies listed in the S&P 500. Given their size, they have a disproportionate effect on the performance of the S&P 500. In fact, their share of market cap is at an all-time high.
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The Mag 7, comprised of Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG, GOOGL), Meta Platforms (META), Microsoft (MSFT), NVIDIA (NVDA), and Tesla (TSLA), are up a staggering 70.2% through the first 11 months of the year as a collective on a market-cap weighted basis. Meanwhile, the remaining “S&P 493” is only 5% higher and has been negative at various times since the start of the year.
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The bottom line is this: if you did not have one of these seven stocks in your portfolio, there is a good chance you could not keep up with the pace of market returns posted by the S&P 500. Goldman Sachs believes that their outperformance will continue into 2024 even though it is unlikely their impact will be as prevalent.
One of the best ways to get exposure to the Mag 7 is through the Invesco QQQ Trust (QQQ), which invests ~40% of its assets into the Mag 7. In Canada, the Invesco QQC ETF (QQC) trades on the TSX Index and holds QQQ and the Invesco NASDAQ 100 ETF. This ETF has about 38% exposure to the Mag 7.
In Canada, the top 7 companies by market cap were not as magnificent. Mainly because in Canada, they are not dominated by tech but by financials and industrials, which had a so-so year. The Canadian version of the Mag 7 consists of Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), Shopify (SHOP), Canadian National Railway (CNR), Enbridge (ENB), Canadian Pacific Kansas City Ltd. (CP), and Canadian Natural Resources (CNQ). Combined, they account for ~25% of the total market cap of the S&P/TSX Composite Index.
As you can see, if it wasn’t for Shopify (the lone tech stock among the Canadian Mag 7) and Canadian Natural propping up the Index and materially outperforming, it would have likely been an underwhelming year for the S&P TSX Composite Index, which is sitting on 7.54% gains on the year.
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To close, we want to highlight another important chart. Once again, we’ve talked many times about the pitfalls of timing the market. It is nearly impossible to time to perfection, and this has been proven time and time again. Unfortunately, none of us know exactly when the markets will rise or crash. We can’t predict the next war, the next environmental catastrophe, or any of the next significant macroeconomic events that impact the stock markets. Trying to time the market is a fool’s game, and we’d have serious questions of anyone who claims the contrary.
We’ve often talked about how missing out on just a handful of the best days in the market can lead to significant underperformance. Thanks to Ycharts, we now have a good chart that helps illustrate this phenomenon, and the differences are quite substantial.
If an investor missed out on the five best days of the year, their returns would be less than half those who remained fully invested at all times. The results become even more pronounced when investors miss the year’s best 10, 15, and 20 days. If you missed only 10 days, then returns are in negative territory. That is a big swing and really speaks to the importance of NOT trying to time the market.
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This is why we talk about being fully invested. Given the volatility, many folks sat on cash this year, hoping to time their re-entry into the market. We’ve received several emails from past members indicating they went to cash and would return once the bull market comes back.
Unfortunately, no one can accurately predict when the markets will have those great days and when they will have the bad days. This is one of the main reasons why both of us (Mat and Dan) remain fully invested. Neither of us has a crystal ball, but what we do know is that we don’t want to miss those days. You know, the days when everyone in Discord suddenly starts popping in to celebrate the big gains of the day. If you try to time the market, there is a good chance you’ll miss those days. As the chart above clearly illustrates, this can significantly impact portfolio returns.
As we mentioned before, there will be no email next week. While it has been a volatile year, there have been plenty of bright spots. We will continue to recap those as we head into 2024 and, as usual, will introduce our yearly Foundational lists early in the new year.
As we enter the holiday season, we want to wish everyone safe and happy holidays. We are truly thankful for your support this past year and look forward to the year ahead.
