Global Economics & Capital Markets

Lessons of 2024—five truths for investors

Lessons of 2024—five truths for investors 

By James Parkyn - PWL Capital - Montreal

What the past year revealed about forecasts, timing the market and diversification  

The markets are a wonderful teacher. If we pay attention, they provide fascinating lessons about investing.

Our friend and author Larry Swedroe put it nicely. “With great frequency, markets offer remedial courses covering lessons they taught in previous years,” he wrote.

“That’s why one of my favorite sayings is that there’s nothing new in investing, only investment history you don’t know.”

With these wise words in mind, let’s take a look at our five main lessons from 2024. Spoiler: It may not come as a surprise that all of this year’s lessons can be found in our lessons from 2022 and 2023.

 

Lesson #1: No one can forecast the markets.

Market forecasters from major financial institutions had a terrible record last year. This is nothing new. They also had a poor record in 2023 and the year before that. The lesson here: Don’t pay attention to the annual caravan of  forecasts and outlooks for the coming year.

It is true that occasionally a handful of forecasters can get it right—generally thanks to sheer luck. Even a broken clock is correct twice a day. That doesn’t mean those analysts’ predictions will be correct in future. No one can consistently predict the markets. Our advice is to tune out the noise and stay focused on your long-term investing success.

 

Lesson #2: Valuations don’t help you time the markets.

After two years of outstanding back-to-back gains for equities, some investors have grown nervous about excessive valuations. But such past periods don’t give solid clues about what to expect this year.

As markets hit repeated new highs last year, they continued to soar—hitting higher highs again and again. Research shows that stock markets don’t necessarily underperform after new highs. “There are no crystal balls allowing us to foresee exactly when each shift will occur [from outperformance to underperformance],” Larry Swedroe recently wrote.

That said, it is a good idea to periodically review your holdings and rebalance them to stay aligned with your target allocations. Speak with your advisor about this process. At PWL, we have such conversations regularly with our clients.  

 

Lesson #3: Active management is a loser’s game.

Just 4% of companies were responsible for all stock market wealth creation above risk-free Treasuries from 1926 to 2023, according to an eye-opening study by Arizona State University finance professor Hendrik Bessembinder.

How do you pick the winning stocks of the future? You can’t. “Picking stocks is more like gambling than investing,” says David Booth, co-founder of Dimensional Fund Advisors.

But you don’t need to find the winners if you simply buy the whole market through an index fund. That way, you can be sure to benefit no matter which companies gain. As Vanguard founder Jack C. Bogle puts it: “Don’t look for the needle, buy the haystack.”

Lesson #4: Diversification works.  

U.S. stocks outperformed their international and Canadian counterparts in 2024. Does that mean diversification no longer works? Of course not. Some sector or country always does better in any given year. We just can’t know ahead of time which one.

Instead of rolling the dice, we must remember why we diversified our portfolios in the first place—to reduce risk while maintaining long-term expected returns.

Research supports this approach. In a paper titled “International Diversification—Still Not Crazy After All These Years” in The Journal of Portfolio Management, the authors concluded that international diversification “does a pretty great job of protecting investors over the long term…. The long-run case for it remains relevant. Both financial theory and common sense favor international diversification.”

Lesson #5: Sticking to your plan paid off in 2024. 

Sticking to your investing plan pays off. Investors who held onto their broadly diversified portfolios through the volatility of recent years were handsomely rewarded in 2024.

The lesson? Invest based on long-term planning—not emotions. Imagine if you had quit the markets early because of the volatility. “Pessimism always sounds smarter than optimism,” Morgan Housel, author of the book The Psychology of Money, wrote, “because optimism sounds like a sales pitch while pessimism sounds like someone trying to help you.”

The markets in their wisdom are continually providing valuable lessons. It’s up to us to notice them and learn from them. This allows us to greet with confidence and discipline whatever may come in 2025. 

Read more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.  

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN, Portfolio Manager at PWL Capital Montreal to determine the best solution for you.

2024 Market Review

2024 Market Review 

By James Parkyn - PWL Capital - Montreal

Stellar Gains, Missed Predictions and Market Surprises  

Since this is my first blog of the year, I’d like to wish readers a happy, healthy and prosperous year in 2025. In keeping with tradition, let’s kick off the year with a look at how global capital markets performed in 2024. 

The short answer: They did exceptionally well. The last two years marked the first time since 1997-98 that the S&P 500 Index had two consecutive years of returns above 20%. All the stock markets we invest in saw double-digit returns.  

(You can find market statistics in the resources section of our Capital Topics website and on our team’s page on the PWL Capital website.) 

 

Pundits got it wrong… again 

This sunny result was certainly not what was predicted by pundits at the start of 2024. Many warned of significant market headwinds, citing inflation and geopolitical worries such as the war in Ukraine, the Middle East conflict and Chinese threats over Taiwan. It didn’t help that the U.S. was headed into a highly divisive presidential campaign. 

But as readers of this blog will know, it’s nothing new that pundits were wrong. On the economic front, central banks proved successful in taming inflation while also managing to avoid triggering recessions.  

 

Decent returns for bonds 

In fixed-income markets, Canadian bonds experienced decent returns as the Bank of Canada lowered its benchmark rate and bond prices rose. (Bond prices rise when bond yields go down.)  

Canadian short-term bonds were up 5.7% for the year, while the total bond market, which holds longer-dated maturities, was up by 4.23%.  

The Canadian short-term bond index currently yields 3.3%, while the total bond market yields around 3.7%.  

 

Banner year for equities 

Equities saw a banner year in 2024. In Canada, the S&P/TSX Composite Index shot up an impressive 21.65% and hit multiple new record highs. It was a broad-based performance, too; 10 of the 11 sectors saw gains. As in 2023, information technology led the way with a spectacular 45.1% return. 

Unusually, value outperformed growth. Large and mid-cap growth stocks gained 19.9% versus 26.0% for value stocks. Small-cap stocks also outperformed large and mid-cap stocks with a performance of 21.91%. 

We highlight value and small-cap stock performance because we tilt toward these asset classes in our clients’ portfolios due to historic data showing their expected higher long-term returns. 

Stellar U.S. equity gains   

U.S. equities also saw stellar gains. The total U.S. market soared 23.81% in U.S. dollars. It did even better in Canadian dollars—up 34.31%—because our currency lost ground against the greenback. 

The growth vs. value story was reversed south of the border. Large and mid-cap growth stocks were up a remarkable 44.67% last year, while value stocks generated a still very respectable 24.07% (both in Canadian dollars).  

In 2024, the big story in the U.S. was the surge of momentum in artificial intelligence stocks. Communication services and technology were the top-performing sectors, led mostly by the so-called “Magnificent Seven” stocks.

Mega-gains for “Mag 7” 

The “Mag 7” are the seven largest U.S. stocks by market capitalization: Alphabet (Google), Amazon, Apple, Meta Platforms (Facebook), Microsoft, NVIDIA and Tesla.  

These mega-companies skyrocketed on average 60.5% last year. The top gainer was NVIDIA (up 171%), while the worst was Microsoft (12%).  

The market cap weight of the “Mag Seven” has only continued to grow. They now represent 34% of the S&P 500 Index and close to 19% of the MSCI All Country World Index.   

International equities also did well 

International developed markets didn’t do as well as North American equities, but still had a good year. Large and mid-cap stocks returned 12.63% in Canadian dollars. International large and mid-cap value stocks outperformed growth, gaining 14.65% compared to 10.7% for growth. Small cap stocks also did well but trailed large and mid-cap stocks with a performance of 10.45%. 

Emerging markets did better, with large and mid-cap stocks returning 17.22%. Large and mid-cap growth outperformed value, and small cap stocks trailed large caps.  

Lost decade ahead? 

The exceptional returns and high mega-cap concentration have raised questions about whether we’ll see below-average equity returns in 2025 and beyond. Some have predicted a “lost decade” ahead. 

Ben Carlson, in his blog A Wealth of Common Sense, found that the S&P 500 Index has seen three instances of back-to-back returns above 25% since 1928. It happened in 1935-36, 1954-55 and 1997-98. 

The subsequent year’s results were all over the map. In 1937, the index lost 35%, in 1956 it gained 7% and in 1999 it shot up 21%. “Terrible, decent and great. Not helpful,” Carlson concluded. 

 

Stick to the plan with discipline 

We may not be able to predict the future, but we can continue following our long-term strategy of diversified investing using broad index funds. After outsized gains in any asset class, it’s also a good idea to take profits and rebalance to stay aligned with your target allocations. 

Sticking to your investment strategy with discipline is the best way to weather any coming doldrums and benefit most from market advances. 

Read more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.  

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN, Portfolio Manager at PWL Capital Montreal to determine the best solution for you.

Lost Decade Ahead?

Lost Decade Ahead?

By James Parkyn - PWL Capital - Montreal

Stay the course with a diversified portfolio and long-term mindset  

Are we headed for a lost decade in equities? It’s a question on many lips after the stock market’s incredible multiyear bull run.

The worries got amplified in October when Goldman Sachs issued a grim report predicting a meager 3% annualized return for U.S. stocks over the next 10 years (or only 1% after inflation).

The report noted that the S&P 500 Index has boasted a 13% annualized return during the past decade. But high valuations and extreme market concentration—both near 100-year highs—will make it hard for stocks to repeat the same gains through 2034, the report said.

 

S&P 500 likely to trail bonds: Goldman Sachs

“It is extremely difficult for any firm to maintain high levels of sales growth and profit margins over sustained periods of time,” Goldman Sachs said. “The same issue plagues a highly concentrated index.”

The investment bank said the S&P 500 has a 72% probability of trailing bonds and a 33% chance of lagging inflation during the next decade.

The report prompted nervous news headlines. “Goldman Sachs Is Forecasting a Dead Decade for the S&P 500. Should You Sell Your Stocks?” one investing site pondered. “For a generation of investors accustomed to boom times, the new paradigm being contemplated would be harsh and unfamiliar,” The Globe and Mail said.

 

Lost decades predicted before 

But as The Globe went on to note, analysts have been warning of a “lost decade” since the start of the current equity bull market.

“We may be looking at a lost decade,” financial historian Niall Ferguson said in 2009. The S&P 500 went on to gain 16.6% a year in the decade that followed.

In 2013, economist John Hussman said “dismal investment returns” were so certain during the ensuing decade that they were “largely baked-in-the-cake.” In fact, annual S&P 500 returns averaged 11.8%.

 

Booms often end in busts

Giving heed to bearish fears can lead to serious portfolio underperformance. But does that mean we should ignore Goldman Sachs’ predictions altogether?

There’s no doubt equity returns have been above average. Historically, above-average performance is often followed by periods of more modest returns or even losses. A decade of 1% real returns is improbable, but it’s not impossible.

The Roaring Twenties were followed by the dismal 1930s. The great 1942-1965 market run ended with 15 years of doldrums in which the S&P 500 saw -1% real annualized returns from 1966 to 1981. After the remarkable 1982-1999 bull we had the misery of 2000-2008.

Market turns can’t be predicted   

Does this mean it’s time to pull out of stocks and hide under a rock? No one knows what the market will do. Even experts like Ferguson and Hussman get it wrong. Stocks could continue to soar. Or they could sell off or move sideways. Trying to time markets isn’t investing; it’s called gambling.

If we can’t predict the market’s turns, what can we do? At PWL, we’ve studied the data and determined that the best response is to diversify, maintain a disciplined long-term investor mindset and leave the forecasts to the horoscope pages.

Stick to the plan

Diversification also plays another role. It accounts for the fact that most wealth creation in equities comes from a tiny number of companies. Just 4% of stocks accounted for all U.S. stock market wealth creation from 1926 to 2023 above a risk-free investment in Treasuries, according to a recent study.

We can’t know which companies will be the future 4-percenters. But we can be sure to own them by buying broad index funds that hold all the companies in various markets.

No bull market lasts forever. But a long-term mindset and an investment strategy suited to your objectives and risk tolerance can give you the confidence to ignore daily market noise and not worry about whose prediction is right.

Read more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.   

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN, Portfolio Manager at PWL Capital Montreal to determine the best solution for you.

2024’s Bullish First Half

2024’s Bullish First Half 

By James Parkyn - PWL Capital - Montreal

An impressive start for equities capped by recent turbulence: part one of our two-part mid-year review 

In this post, we’ll review the performance of the markets so far in 2024. It’s a subject we cover twice a year to help you better evaluate your portfolio’s performance. 

Our review will come in two parts. First, we present our mid-year market check-in. In our next blog post, we’ll take a look at the market turbulence of the first few days of August and our thoughts on steps to help protect your portfolio. 

Recent volatility aside, the year 2024 got off to a great start. Equities built on a powerful rally in 2023 that saw the S&P 500 Index return an impressive 15.8% in the last two months of that year. 

 

Rally came despite uncertainties 

As we mentioned in our recent podcast, the strong results for 2024 came despite a load of uncertainties. Stubborn inflation meant prolonged high interest rates that impacted the economy. Market pundits speculated about the possibility of a soft landing or even recession. 

This has been coupled with instability over Russia’s war with Ukraine, conflict in the Middle East, U.S.-China superpower rivalry and heated election campaigns in major powers, including the U.S.  

But despite the headwinds, equity markets have shrugged off the doubts. As the Wall Street saying goes, the bull market has been climbing a wall of worry. As well, gross domestic product growth has remained positive in Canada, the U.S. and the Euro Area, and inflation has started to decline, allowing some central banks (like Canada’s) to start cutting rates. 

 

Short-term bonds outdid longer-term 

How did markets do in the first half of 2024? Starting with fixed income, yields in Canada and in the U.S. remain well above the average of the last 20 years. 

In Canada the yield on the 10-year Government of Canada bond was 3.5% on June 30, which is 100 basis points above the 20-year average of 2.5%. In the U.S., the yield on the 10-year Treasury note was approximately 4.4% on June 30, or 140 basis points above the 20-year average of 3.0%.  

Year to date, Canadian short-term bonds were up 1.6% as of June 30, while the total bond market, which holds longer-dated maturities, was down by 0.4%. (Remember that bond yields and bond prices move in opposite directions.)  

 

Almost all equity indexes hit new highs 

Equity markets have done much better. All the main indexes we follow had strong positive returns in the first half of the year, making new all-time highs. U.S. equities have done especially well, with the S&P 500 hitting a remarkable 31 new highs by mid-year. 

An exception has been the MSCI Emerging Markets Index, which was impacted by the poor performance of Chinese equities which despite their recent surge remain down close to 42% from their all-time high. 

In Canada, the S&P/TSX Composite Index was up by 6.1% in the first half. Large and mid-cap growth stocks led the way with a 7.4% gain compared with 4.7% for large and mid-cap value stocks. Small cap stocks outperformed large and mid-cap stocks with a performance of 9.3%.  

S&P 500 had its 13th best yearly start since 1950 

South of the border, U.S. equities were also on a tear. The S&P 500 Index had its 13th best yearly start since 1950, while the U.S. total market index had a strong performance of 13.6% in U.S. dollars or 17.2% in Canadian dollars. 

Driven largely by soaring tech stocks, U.S. large and mid-cap growth names did especially well. They had an extraordinary 24.6% return as of June 30 in Canadian dollars compared to 10.1% for large and mid-cap value stocks. U.S. small cap stocks, however, underperformed. 

International developed-country large and mid-cap stocks also did nicely—up by 11.1% in local currencies. Small cap stocks trailed, however, with a performance of just 3.8%. Emerging markets stocks also performed well, gaining 11.2%; again, value and small-cap stocks trailed growth and large cap. 

“Vulnerable to a major correction” 

When François and I did our mid-year market review podcast on July 31, we wondered how long the outperformance would persist. “The noise in the financial media, from market analysts, is that valuations levels are stretched and are vulnerable to a major correction,” we said. 

Although no one can predict the future and the market is a random walk, the equity markets did correct sharply in the days after our podcast. 

In our next blog post, we’ll review what happened and share our advice on how to help protect your portfolio in times of turbulence. 

More detailed market statistics can be found on our Capital Topics’ website. Read more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.  

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN, Portfolio Manager at PWL Capital Montreal to determine the best solution for you.

Magnificent 7 Peaks and Perils

Magnificent 7 Peaks and Perils 

By James Parkyn - PWL Capital - Montreal

Today’s high-flying stocks are rarely tomorrow’s. Research shows you lose when you chase past performance 

Yesterday’s home runs don’t win today’s games. Keep this classic truth from Babe Ruth in mind when you hear the market chatter about the “Magnificent Seven” stocks.  

These are the seven high-flying tech mega-companies that have investors and commentators abuzz lately: NVIDIA, Microsoft, Apple, Alphabet (Google), Amazon, Meta (Facebook) and Tesla. 

The Mag 7, as they’re sometimes called, performed exceptionally in 2023, ranging from a 48% gain for Apple to an astonishing 239% for NVIDIA. As a group, these seven giants returned 75.7% last year, more than triple the 24.2% gain of the S&P 500. As of mid-June, the Mag 7 made up 28.8% of the S&P 500 index’s market cap. 

(I talk more about the Magnificent Seven in my latest Capital Topics podcast with François Doyon La Rochelle.) 

 

Not a new phenomenon 

The seven-star stocks certainly have impressive results, but this is far from being the first time a small handful of darling companies has turned heads or dominated markets. In the late 1990s, the dot-com companies were all the rage. In the 1970s, we had the Nifty Fifty. 

The Mag 7 stocks themselves are a successor to the FAANG big tech stocks (Facebook, Amazon, Apple, Netflix and Google), which in turn succeeded the FANG stocks. Today's stock concentration is also nothing new. In fact, while NVIDIA is 7% of the total U.S. stock-market value, that’s small potatoes compared to AT&T, which was 13% of the market in 1932, the Wall Street Journal reports. In 1928, General Motors was 8% of the market, while in 1970, IBM made up 7%. 

 

High performers underwhelmed 

As the examples of AT&T, GM and IBM show, market leaders don’t stay at the top forever. In January, when Amazon became the world’s largest company by market cap, the Wall Street Journal took a look at what happened to the 10 previous companies that held the top spot. 

In the five years before they reached No. 1, these companies outperformed the market by an average of 48 percentage points, the newspaper found. But over the five years after they hit No. 1, they underperformed the U.S. stock market by 6 percentage points on average. 

It’s like the old maxim says: Past returns are no guarantee of future results. Indeed, if we can be fairly certain of anything, it’s that today’s market heroes are unlikely to be tomorrow’s. 

 

Top 10 no more 

In 2000, the top 10 stocks in the S&P 500 included tech giants Microsoft, Intel, Lucent, IBM and Cisco. Today, except for Microsoft, none of these companies or any of the other then-top-10 stocks are in the list. IBM was one of the largest U.S. stocks for over six decades and made up 6.4% of the S&P 500 index in 1985; as of late June, it sits at No. 56 and has a weight of 0.35%. 

Another classic example is General Electric (GE). It was in the top 10 for nine decades, but is now No. 48. In fact, Morningstar recently named GE to the top spot in its list of “15 Stocks That Have Destroyed the Most Wealth Over the Past Decade.”  

GE’s market cap dropped by $55 billion over the 10-year period ending in 2023, by far the most of any U.S. stock, Morningstar said. 

Diversification is key 

IBM and GE aren’t unique. A former Yale University finance professor, Antti Petajisto, looked at data going back to 1926. Stocks that were among the top 20% performers over the prior five years had a median market-adjusted return 17.8% lower than the broad equity market during the ensuing 10 years, Petajisto found

The results suggest it’s a bad idea for investors to hold a high portion of their assets in single stocks, he said. “Concentrated stock positions usually contribute negatively to portfolio returns… The case for diversifying concentrated positions in individual stocks, particularly in recent market winners, is even stronger than most investors realize.” 

High-flying stocks come and go 

At PWL, we fully agree. This is why we invest in a broadly diversified portfolio using evidence-based strategies. That has allowed us to benefit from the Magnificent Seven’s gains through our ownership of broad index funds. And it also means we’re well positioned to benefit from the next generation of market stars. 

At times like these, we like to refer to Warren Buffett’s words of wisdom. In 2018, Buffett was asked by an investor at Berkshire’s annual meeting why he hadn’t bought Microsoft. “We missed a lot in the past, and I suspect we’ll miss a lot more in the future,” Buffett responded. 

In other words, high-flying stocks come and go. Swinging wildly for the fences doesn’t win the game. Solid, consistent play over the long run does. 

 

Find more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website. 

TAKE ADVANTAGE OF THE EXPERTISE OF JAMES PARKYN, Portfolio Manager at PWL Capital Montreal to determine the best solution for you.