McMurtry Investment Report and Model Portfolios™

McMurtry Investment Report – January 2024

Also available in PDF: McMurtry Investment Newsletter – January 2024

January 2024 Investment Newsletter


The year 2023 in review


Total Return %

Despite all the negative headwinds, 2023 turned out to be a strong year for equity returns.

The total return of the S&P 500 of 25.97% was sharply higher than most of the equity strategists’ predictions on Wall Street. The TSX Composite total return was still a respectable 11.09%.


The S&P 500 index is a market capitalization weighted one and consequently can frequently produce

results that are not consistent with the average stock. The equal weighted S&P 500 ETF, symbol RSP, registered a much lower 13.23% return over the same period.


Looking under the hood showed that only 7 heavily weighted tech and communication stocks resulted in the outperformance of the S&P 500 index. The seven stocks include Apple, Alphabet, Microsoft, Amazon, Nvidia, Adobe and Meta. As you can see from the attached chart, the total returns of these companies went from a low range of 49.34% for Apple to a high of 239.30% for Nvidia.


Overall equity market breadth began improving over the last three months of the year with the equal weighted RSP index outperforming the heavily weighted S&P 500 index over the last month.


The Russell 2000 small cap index sharply rebounded over the last quarter of 2023. The EAFE Europe, Asia and the Far East index almost equalled the total return of the S&P 500 index over the last three months and marginally outperformed the index in December.


The Vanguard Growth ETF, VUG, registered a total return of over 46% for 2023, while the Vanguard Value ETF, VTV rose only 9.26% over the same period.


In regards to fixed income, the 7–10-year US Treasury ETF, IEF, reported a total return of 3.21% while the Canadian 1–5-year corporate bond ladder jumped by 6.16% in 2023.


Commodity Returns

WTI crude oil had its first negative return in several years registering a 11.34% decline. On the other hand, gold bullion rose by over 13% with 4.17% gain over the last two months. Silver registered a small decline of 0.77%. Iron ore was one of the strongest commodities with a gain of over 23% in 2023. Despite all the rhetoric, lithium prices were hit by overcapacity and fell by over 81%. Even though 2023 saw interest rates rise for most of the year, lumber rose by over 9% with all of the gain coming over the last two months of the year. Copper, considered both an industrial and a green metal, rose by 1.78% with over an 11% gain over the last month of the year. This sudden change in direction in copper prices can be explained by the closure of First Quantum’s Cobre Panama Mine and some other closures globally due to either geo-political or environmental issues.


Uranium prices rose over 89% last year propelled by the focus on clean energy and the re-opening of all Japan’s reactors that had been closed for over ten years.


US Dollar vs. Global Currencies

Over the last year, the US dollar was up 7.56% versus the Yen, 23.10% versus the Russian Ruble and 2.92% versus the Chinese Yuan. The greenback was down 3.23% versus the Euro.


A change in direction occurred over the last two months of last year with the US dollar falling by 5.81% versus the Yen, 2.70% versus the Ruble and 3.1% versus the Yuan. The greenback continued its fall versus the Euro over the last two months falling 3.23%.


The decline in the US dollar and the rise in gold bullion, copper, lumber and other commodities, except for crude oil, can be explained by the sudden shift in the US Federal Reserve’s tone to a much less hawkish approach. Despite domestic and global inflation falling sharply throughout the year, the Federal Reserve finally realized that the end of interest rate increases was likely in 2024. This shift in the Federal Reserve’s tone led to both the equity and fixed income markets experiencing a sharp rebound over the last few months of the year.


The broadening out of the equity market was also evident over the last few months of the year. In order for the equity market to go higher, it is essential to see all equity sectors now participating on the upside and not simply the high growth tech and communication stocks.


Equity Sector Performance


Regarding equity sector performance during 2023, the interest sensitive Reit sector climbed over 9% over the last month to register a total return of 2.06% for the year.  Canadian Financials kept pace with the TSX by registering a 12.14% total return, with a 12.54% rebound over the last three months. Once again this can be explained by the much less hawkish Federal Reserve and the decline in interest rates in the bond market. BMO’s Global Base Metals ETF, ZMT, rose by 14.30% over the last year. BMO’s equal weight Canadian Energy ETF, ZEO, managed to rise by over 6% despite the decline in crude prices. The strongest equity sector groups in the US were the Technology, Consumer Discretionary and the Industrial sectors. Invesco’s Equal weight Technology ETF, RSPT, rose by 34.84% in 2023, while the equal weighted Industrials ETF rose by almost 22%. Lastly, the equal weighted Consumer Discretionary US ETF jumped by over 22% with over 13% increase over the last three months of the year.


Selected Individual Stock Returns %


Total Return %

Some of the best performing stocks in the Financials sector were JP Morgan, Fiserv and Visa in the US and Brookfield Corp, Brookfield Asset Management CIBC, Manulife and National Bank in Canada.


In the Energy sector, overall total returns were mainly negative with some pockets of strength. Uranium producer Cameco and Sprott’s Uranium fund rose by over 87% for both securities. Parkland Fuel jumped by over 48% and Canadian Natural Resources climbed by 20.7%. Meg had a strong year rising by over 27% and Pembina Pipe shined relative to its peers with a total return of 5.55%.


The Materials sector saw robust returns. Linde, the US industrial gas producer climbed by over 26% while Freeport McMoRan rose by 13.7%. Alamos Gold jumped by over 31% led by rising bullion prices and increasing production. Two other Canadian copper producers, Capstone and Lundin Mining rose by 25.73% and 33.36% respectively. Lastly Wheaton Precious Metals jumped by over 23%.


The Industrials sector also registered strong returns both in Canada and the US. Parker Hannafin jumped by 60% and trucker JB Hunt jumped by over 14%. Our two domestic Caterpillar distributors, Toromont and Finning rose by 20.81% and 16.94% respectively. Element Fleet rose by over 19% last year while CAE rose by 11.46%.WSP Global rose by almost 20%, while Stantec had a stellar year rising by over 66%.


In the Consumer Discretionary sector, Tesla rose by 104% with Ford and GM rising by 16.7% and 7.8% respectively. Martinrea, our smallest domestic auto parts company registered a strong 20.5% total return compared to Magna’s 3.5% return. Restaurant Brands jumped by over 21% propelled by strong performance at Tim Hortons and Popeye’s. Dollarama also strongly outperformed the market with a total return of almost 20%. Lululemon rose by over 61%, sharply outperforming Nike’s -6% return.


In the Consumer Staples sector, higher interest rates for the majority of last year was a major headwind for this sector. Despite this headwind, Walmart and Monster Beverage rose by 12.6% and 12.96% respectively. Premium Brands jumped by over 18% while the perennial favourite Alimentation Couche-Tard rose by a healthy 29.85%.


In the Communications sector, Google jumped by over 56% while Meta rose by a whooping 194%. Quebecor B shares rose by over 13%, a strong showing relative to its domestic peers.


In the Technology sector, the overall performance returns of most stocks sharply outperformed both our domestic and the US indices. Nividia rose by over 239% propelled by its new AI focus with its semiconductor chips. Other semiconductor companies including Taiwan Semiconductor, AMD and Micron registered strong performance numbers. Apple, Microsoft, Uber, Adobe and our domestic Open Text also all sharply outperformed the overall benchmark indices.


As a result of higher interest rates, companies in the Utilities sector were for the most part poor performers. However, Altagas reported a total return of over 23% while Fortis managed a 6% return.


The Reit sector also experienced a major headwind from rising rates. Despite this, US Reits Prologis, Equinox both reported over 20% returns for the year. Domestically, Boardwalk reported an almost 48% return that was greatly helped by the sharp increase in immigration to lower rent Alberta. The industrial Reit, Granite also showed strength by rising by over 15%. Lastly there was a sharp turnaround in the domestic supply / demand outlook for retirement homes after Covid and Chartwell benefitted from this by rising by almost 47%.


Lastly the Healthcare sector did not have a good year in terms of total return. However, pharma companies, Vertex, Novo Nordisk and Eli Lilly all reported very impressive numbers. The US device company, Stryker, also rebounded nicely with more non essential operations coming back after Covid.


Outlook for 2024


The recent December US payrolls number came in better than expected. This reduces the probability of a hard landing. However, there were some downward revisions to the previous month that makes these numbers a little weaker. US corporate profit growth is expected to rebound this year, even though the consensus estimates are still a little too high currently.


The broadening of the equity market into all sectors, including small caps, is a healthy development and is positive for equity returns this year.


This Thursday the monthly US CPI number will be announced. In order for the equity market to rise materially from current levels, the growth in domestic US inflation must continue its downward progression.


While rates have backed up marginally so far this year, inflation continues to gradually decline. Interest rate cuts are anticipated for this year, but the timing of these cuts is still open for debate. I still advise that investors extend term by reducing their money market and short term GIC positions to take advantage of expected rate declines later this year.

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