Market Review
The Russell 1000 Index (CA$) posted strong returns in the fourth quarter (Q4), gaining 9.2% on broad-based strength supported by better-than-expected earnings and hopes the U.S. Federal Reserve (the Fed) will cut interest rates early in 2024. The narrative reversed from the Q3 declines with improving economic data, declining inflation trends and increased confidence in the potential for a soft economic landing. The late quarter, high-beta rally lifted high-risk assets. Quality, as a factor, underperformed. Price/earnings multiples expanded with the rapid decline in the 10-year U.S. Treasury yields. Most sectors gained during Q4 led by interest rate sensitive utilities and real estate. Energy was the only sector that posted a decline.
The strength in Q4 caps a remarkable year of performance for the Russell 1000 Index, and more specifically, growth-oriented stocks in the index. The Russell 1000 Index gained 23.1% for the year while growth stocks, measured by the Russell 1000 Growth Index (the Growth Index), rose 38.9% in Canadian dollar terms over the same period.
Performance Review
Sun Life MFS U.S. Growth Fund (the “Fund”) outperformed its benchmark, the Russell 1000 Index over Q4.
Contributing to relative performance were:
- An underweight position in energy, the weakest-performing sector in the benchmark, contributed to relative performance.
- A combination of both stock selection and an overweight position in information technology, one of the stronger-performing sectors in the benchmark, contributed to relative performance.
- Stock selection in consumer discretionary contributed to relative performance.
- A combination of both stock selection and underweight positions in financials, industrials and real estate, areas of strength in the benchmark, detracted from relative performance.
Q4 can be characterized as a tale of two halves. The first part of the quarter traded on fundamentals, and the portfolio outperformed due to stock picking. During the second half, the Fed Chair Powell’s speech, coupled with softening inflation data, caused interest rates to peak and fall precipitously. The expected pivot in Fed policy catalyzed a high beta rally that was a headwind to portfolio performance.
Manager outlook
Looking ahead, our sub-advisor MFS Investment Management (MFS) expects the market to remain choppy, and they remain cautiously optimistic. In the short run, market volatility is expected to be dominated by macroeconomic events, but the earnings outlook appears to be improving in areas supported by longer-term growth trends. MFS continues to monitor trends closely. While employment data remains healthy, the economy still faces the potential headwind of the lagged impact of higher rates.