Our 2023 Winter Market Update starts much like the 2022 version: November provided a considerable rebound in most markets, posting one of its largest rallies on record. After challenging months in September and October caused by renewed concerns about inflation and interest rates continuing to rise, major stock markets are closing in on all-time highs once again. 2023 has been a lesson in market noise. Following a challenging 2022, many were calling for a recession in 2023. However, as time went on and the markets and economy showed resilience, many Economists were quick to revise their forecasts more positively. This year has been a great example of why it’s important to stick to the plan, regardless of what we hear on the business news channel.
Central banks continue to remain in-focus globally. The Bank of Canada and the U.S. Federal Reserve maintained their overnight interest rates at 5% and 5.50%, respectively. Both agencies have continued to signal their intention to leave rates higher for longer. This has been important as inflation has continued to moderate. It also appears the bond markets are beginning to believe in what central banks are telling us, as bonds rallied in the quarter.
2023 stock markets have been a story of concentration. While major indices such as the S&P 500, appear to have had a great year, the story is a little different when we look under the hood. Most of the performance of the S&P500 can be attributed to a handful of companies, recently referred to as the ‘Magnificent 7’ – Apple, Amazon, Alphabet (Google), Nvidia, Meta, Microsoft, and Tesla. These 7 companies are up an average of 101.18% YTD as of December 1. This has resulted in a 21.38% total return YTD for the S&P 500. For context, the return of the S&P 500 Equal Weight index is only 6.56% YTD as of December 1.
As 2023 nears its close, the risks heading into 2024 remain much the same – what will be the effects of meaningfully higher interest rates on the global economy, over time? In the same breath, these higher rates create opportunities for better returns on the low-risk side of
our portfolios. This is a meaningful change for retirees who have had to cope with poor returns on bonds, cash, and GICs, for many years. We continue to favour an overweight to high quality fixed income investments within our portfolios as we look to further benefit from higher rates, and eventually, the decline of those benchmark rates. We have begun to see improved returns from our fixed income investments this quarter and anticipate that this will continue in 2024.
With interest rates appearing to have stabilized at levels investors have not seen in over a decade, it can be tempting to look at GICs and high interest savings accounts as a no-risk, foolproof investment option. While they are great portfolio stabilizers and make sense as a piece of an investment portfolio, history tells us to stay the course and remain invested. Historically, when GIC rates are at their most attractive levels, stocks and bonds continue to outperform. The chart below shows CDs (the U.S. equivalent of a GIC) compared to traditional asset classes throughout historic interest rate peaks:
As you can see, in most cases, remaining invested was the better choice. It does not mean that GICs and cash equivalents cannot be an important part of the portfolio, but it does explain why moving portfolios entirely to GICs does not make sense – even when rates feel extremely attractive. This goes to show why we continue to stick to our game plan and allocate to high quality fixed income within our portfolios.
Tax Loss Selling – Turning Lemons into Lemonade
There are situations where selling an investment at a loss can make sense. You no longer believe in the investment’s ability to recover, you have found a better opportunity, or you simply require funds for lifestyle spending. Instead of simply accepting the loss and moving on, triggering a loss can be beneficial as it can offset realized capital gains on other investments you may have sold, whether it be in the same year or year’s past. This strategy is referred to as tax loss selling.
This strategy involves selling investments that have incurred a loss to offset any realized gains during the tax year. By selling these underperforming assets, investors can use the losses to reduce their overall taxable income. Investors can apply these losses against any capital gains realized in the same tax year or carry them forward to offset future gains. This strategy can be particularly useful in minimizing tax liabilities and optimizing investment portfolios.
However, it is essential to adhere to specific regulations and timelines set by the Canada Revenue Agency (CRA) when executing tax loss selling. For instance, investors must ensure that they sell investments by the designated deadline to claim the losses for that tax year and must avoid what CRA refers to as ‘superficial losses’, which occur when an investor sells an investment to trigger a loss, and then immediately acquires an identical investment. These losses can be denied.
While tax loss selling can be advantageous, it is crucial to consult with a tax professional or financial advisor to navigate the process effectively and within the bounds of tax laws. This strategy requires careful consideration of individual circumstances and investment goals to maximize its benefits.
Performance chart source: https://am.jpmorgan.com/ca/en/asset-management/institutional/insights/market-insights/guide-to-the-markets/
Performance data: YCharts