Index | Q4 2024 | YTD |
---|---|---|
S&P/TSX Composite (C$) | 3.8% | 21.7% |
S&P 500 (US$) | 2.4% | 25.0% |
S&P 500 (C$) | 9.2% | 36.0% |
MSCI EAFE (US$) | -8.1% | 3.8% |
MSCI EAFE (C$) | -2.1% | 13.0% |
FTSE TMX Universe Bond Index (C$) | -0.04% | 4.23% |
C$ / US$ | 1.3499 to 1.4389 (-6.2%) | 1. 3226 to 1.4389 (-8.1%) |
* Index returns are total returns, including dividends.
ECHOES OF EXCEPTIONALISM
In the 17th century, as the driving force behind global trade and commerce, the Dutch Republic was considered the largest and most advanced economy in the world. The Dutch East India Company (VOC), the world’s first multinational corporation, dominated trade routes across Asia, bringing enormous wealth to the Netherlands. Amsterdam emerged as the financial capital of Europe, home to the world’s first stock exchange where investors openly traded shares and revolutionized the way capital flowed around the globe. The powerful Dutch navy ensured that their important trade routes remained secure. Goods like spices, textiles, and precious metals moved freely through their ports, fueling a booming economy and making the Dutch the wealthiest people in Europe. This economic prosperity also ensured that culture and science flourished and thrived, with artists like Rembrandt and Vermeer capturing the nation’s wealth and sophistication in their iconic works and Antonie van Leeuwenhoek perfecting the microscope to make groundbreaking discoveries in microbiology. The Dutch Republic’s influence and dominance on the global stage was unparalleled.
By later in the century, however, the tide had started to turn. The British, with their expanding empire and rapidly growing navy, began to challenge the Dutch, both militarily and economically. The Dutch navy, once the most formidable force on the seas, now found itself outclassed by Britain’s more powerful fleet. Meanwhile, the rise of the British East India Company and other European competitors began to erode the Dutch monopoly on trade. As Britain surged ahead with its industrial revolution, the Dutch Republic began to fall behind. By the 18th century, the Dutch Empire had been eclipsed, its military and economic influence diminished. What had once seemed like an unstoppable empire had been overtaken, serving as a sobering reminder that no nation, no matter how prosperous or powerful, is immune to the forces of competition and change.
American exceptionalism has been an overarching story of the past decade. Their economy has hummed, and asset prices have soared compared to other developed nations. Over the past decade, the U.S. has brought incredible technological innovation to the spotlight: cloud computing, artificial ntelligence, self-driving cars, self-landing rockets. The U.S. was responsible for quickly 2 ending the first global pandemic in modern history thanks to “Operation Warp Speed” and the two most viable COVID vaccines rolled out by Pfizer/BioNTech and Moderna. Since 2014, after recovering from the global financial crises, U.S. housing prices are up 4.2% annually and the S&P 500 has returned 13% annually. If the past decade was a 100-meter dash, the U.S. would resemble Usain Bolt coasting past his competitors. The evidence is reflected in today’s markets. If markets are a summary of the investment communities’ forecasts, the S&P 500 outperformance and relative strength of the U.S. dollar versus other currencies show that investors generally believe American exceptionalism is here to stay. For example, the S&P 500 now accounts for over 70% of the global market-capitalization weighted index (shown below). Let that sink in: investors believe that more than 70% of the entire world’s value of public companies is in the United States alone. Today we see the U.S. positioning themselves to continue this winning streak. With strong economic growth over the past year, and a newly elected leader that aims to advance U.S. business through onshoring, tariffs, and deregulation, it is possible U.S. businesses could maintain their strength and positioning into the foreseeable future.
History shows how difficult it is to predict the future, especially the future of macroeconomics and global affairs. There are countless moving parts and believing we could predict the cumulative outcome of them all would be arrogant, to say the least. Yes, it is important to have exposure to the U.S. as it’s a dominant global country for business, but at the same time we are unwilling to hop onto a bandwagon that has already been winning. The chart below illustrates how expensive the S&P 500 is relative to its history. Therefore, our overall return expectations for the U.S. markets are lower than they have been in the past.
Notably, you will see that much of the outperformance and “expensiveness” in the U.S. market is concentrated in the top 10 companies. As shown below, the largest American companies continue to increase their dominant share within a market-capitalization weighted index like the S&P 500, and most of its 2024 returns came from those same companies. Looking at the equal-weight S&P 500 total return of 12.8% versus the market-capitalization weighted return of 24.9% (the below chart shows only price return, as opposed to the total return which includes dividends), we see that there are many companies that have not had their day in the sun over the past year. That is why we will always try to selectively choose long-term opportunities that we believe are still inexpensive and that will continue to produce strong returns over the long term.
Studying history can help one better understand the present. We see similarities between the Dutch Republic of the 17th century and the United States of today. Of course we will continue to have exposure to the U.S.; it is home to many dominant businesses with incredible growth. But, as Howard Marks explains in his book The Most Important Thing, reversion to the mean is a powerful force, and those who underestimate it can suffer the consequences. We are prudent investors and try not to make the mistake of believing that past outperformance will continue forever. We will learn from the fall of the Dutch Republic and continue to invest only in areas we think are great value, regardless of geography.
THE NATURE OF CANADA
“Struggles at home are like the challenges in nature; they force us to grow, to adapt, and to rediscover the balance we need to survive.” – David Suzuki
Over the last few years, the Canadian economy has been notably weaker than that of our southern neighbour. As many news headlines have already highlighted, our GDP is growing less quickly, our GDP per capita has fallen back to 2017 levels, and the Canadian dollar relative to the U.S. dollar is at its lowest since the COVID pandemic. At the same time, inflation has dropped back to the target range, with the most recent reading in November being 1.9%. To aid our slowing economy, the Bank of Canada lowered interest rates on five separate occasions in 2024, from 5.0% to 3.25%; our political sphere is also blanketed with uncertainty. Prime Minister Justin Trudeau has recently resigned, leaving questions for Canadians like, “At what point will an election take place in 2025 and who will lead the Liberal Party?” and “What will become of the newly proposed capital gains tax?” The Canada Revenue Agency has so far been advising Canadians to file taxes based on the higher inclusion rate, even if the measure hasn’t come into law yet. We suggest you seek guidance on this from your accountant as more information should become available as we get closer to tax filing season.
While the headline numbers may look bleak for Canada, and it seems Canadians’ pocketbooks are getting tighter, Canadian markets appear to contradict this. In 2024, the SP/TSX (Canadian stock market index) showed a total return of 20.5% (including dividends reinvested). How can economic metrics be worsening if markets are soaring?
When we look more closely at the TSX total return for the year, it becomes clear that roughly 85% of the return in 2024 was due not to Canadian companies fundamentally growing their earnings but by the market multiple increasing from 14.5x price to earnings (P/E) ratio to 17x P/E. In other words, markets have been elevated more by investor optimism and sentiment than by the underlying strength of Canadian companies. Although the American economy is faring better than ours, we see a similar result when looking at the U.S. market growth this year, with 65% of the S&P 500 total return coming from a higher P/E multiple.
Although equity markets may seem elevated relative to history and appear inconsistent with the strength of the global economy, it is vital to remember what we don’t know. We don’t know where global economies will be one month, one year, or one decade from now. We don’t know how individuals – or businesses – will adapt to lower interest rates. We don’t know where inflation will go from here. Predicting these and other things is futile. A study conducted by Vanguard showed that over a one-year period, 70% of the time it is better to invest a lump sum all at once than to wait in cash or dollar-cost-average purchases (a strategy whereby one invests the lump sum at different times throughout the year). To quote Kenneth Fisher, “Time in the market beats timing the market.”
It is often said that it is most important to stay disciplined on price when markets are expensive. At Evans we are always looking for places to deploy your capital that offer strong returns while protecting the downside. How do we do this? By looking at unloved or under-covered companies and finding an inexpensive price to pay for future company earnings. By remaining disciplined on price, we are protecting you from a downward shift in sentiment that results in a lower P/E multiple. The chart below shows how we continue to find good value for you in today’s markets relative to our benchmark index.
TO 2025 AND BEYOND!
As we enter a new year, we would like to take a moment to reflect on how far we have come and where we are going. Our founder Rob Evans began the firm in 1988 managing money just for friends and family; we have now been in business, and growing, for 36 years. Similarly to how we manage our clients’ capital, we have built the firm slowly and intentionally over time. We are now trusted by over 350 families to help manage their financial goals. This year we passed the $2 billion dollar mark in assets under management: we hope to continue growing in the future thanks to a combination of security appreciation, stock dividends, and income generation from our bond and preferred share holdings, as well as by continuing to prudently add new accounts for new and existing clients as needed.
We love working with you, our loyal clients, to understand your financial goals and help you live a fulfilling life with your wealth. In the pursuit of bringing that passion to more people, we have positioned the firm over the past year to grow further. We have hired two new Client Service Associates, Katie Elport and Samantha Omlas, as well as Janelle Li, our new Director of Operations and Compliance, to improve our systems processes. In addition, we have made technological investments to speed up our software and create a more seamless client experience. Our hope is that these improvements will help us to invest your wealth and provide you great advice and customer service in a timely manner.
We are excited for what the future has in store for Evans, and we want to thank you for trusting us to provide you with accurate and personal advice and to manage your hard-earned money. Here’s to 2025!
The Evans Team