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July Monthly Market Commentary & Forecast

Date: August 14, 2019

The July markets started with help from an accommodating Federal Reserve and other central banks and benefitted from the de-escalation of trade tensions to support stronger markets.  The month didn’t end that way.  The MSCI World index jumped 0.42% in July.  The US markets continued rallying after their best June on record since 1938 with the S&P500 up 1.31% for the month while the Dow Jones jumped 0.99%.  The Nasdaq jumped another 2.11% after dropping to correction territory in May.  The TSX struggling to stay in positive territory with a meagre 0.15% gain for the month.

The biggest move was from the gold sector (up 5.44%) as the gold price stayed above the $1400 level.  The heavily weighted and economically sensitive sectors moved higher because of lower interest rate environment.  These include financials (+0.61%), consumer discretionary (+3.45%), and information technology (+3.24%).  The energy index continues to be a drag on the TSX dropping 3.95% even with the bounce back in crude oil prices, as the OPEC coalition agreed to curb oil production by 1.2M barrels/day for another nine months.  Oil markets continue to be concerned about the surging domestic stockpiles, the fear of a slowdown in global economic growth and the lack of funds flow into the sector.  The health care sector plummeted 13.20% in July as concerns about valuations and corporate governance have made investors nervous about valuations in the cannabis sector.  Canopy Growth CEO Bruce Linton was forced to resign as controlling shareholder Constellation Brands was not happy with the continued losses from the company and CannTrust was caught growing cannabis in illegal grow rooms.

The yield on the benchmark US 10-year Treasury dropped another 6bp to 2.03% and now down a remarkable 120bp fromthe high of 3.23% in the fall of 2018.  The federal reserve did as promised and cut interest rates by 25bp in a pre-emptive move to cushion the economy from a potential global slowdown.  This was the first interest rate reduction since 2008.


Market Return (%)*
Canada (S&P/TSX) 0.3
US (S&P) 2.2
MSCI (World) 1.2
Best (Brazil) 2.6
Worst (Sweden) (4.6)

*In Canadian dollar terms as at July 31, 2019

All the above is before the infamous Aug 1 “Trump tweet” on new tariffs on $300B of Chinese imported goods.

We came across an interesting chart this month as it relates how a few days account for the bulk of the stock market returns.  As can be seen from the chart, most of the stock market moves for the last 10 years have been clustered between the +1% and -1% goalposts.  Although higher volatility increases the chances of prices moving beyond the goalposts, these tend to be irregular in occurrence compared to the usual.  The chart also highlights the exceptional 7% drop on Aug 8, 2011 and the more recent Aug 5, 2019 drop of 3%. Is August becoming the new October for notable market declines?

It’s an open question whether the latest wave of selling hitting the market is about to end.  Fresh fears about the state of the global economy have been raised after global central banks slash interest rates causing bond yields to plummet.  Fresh jabs between China and US on the trade front is not making matters any better.  Earlier optimism for a trade deal by the end of the year is quickly fading.  The risk is that the US-China trade war has now escalated into a potential currency war with accusations of currency fixing.

Early this year, we did not like the undertones of the stock market compared to the economic outlook dynamics.  US markets hitting new highs was precipitated on the economy continuing to grow and corporate profits following suit.  We thought preservation of capital and remaining defensive took precedence over aggressive growth and thus we raised higher than normal cash levels.  We remain defensive but now have the cash to deploy when we see fit.

The odds of a global recession risk have increased as investors are worried that the global economy will be the biggest casualty in Trump’s trade war.  The traditional yield curve inversion continues to point to a higher chance of recession.  The recent increased inversion of the yield curve now implies a 37% chance of a downturn in the next 12 months, according to the New York Fed’s model.  Other signals of a slowdown include the sharp drop in ISM non-manufacturing indices to multi-year lows.  The ratio of coincident-to-lagging indicators also continues to trend lower as typical before any recession.  Metal prices and oil prices

have both entered correction territory as these economically sensitive commodities reflect upon the growing risk of slowing demand from an economic slowdown.  Gold prices are hitting multi-year highs as investors’ fear have driven them to buy the safety of that asset class.  Anti-China protests in Hong Kong continue to get worse as shutdowns to the main airport run the risk of serious slowdowns in such a key economic part of the world.  Conflicts in the middle east continue with US-Iran tensions brewing with chilling warnings being sent from the US to Iranians.  Throw in the risk of Brexit disruption on the Eurozone and this has the chance of further disrupting global trade.

Our Stone cash levels have stayed the same and our portfolios have been structured as more defensive compared to the index and each portfolio mandate.  We believe the best way to invest in markets as these is to have a total return focus.  Investors should be rewarded by buying companies with a strong growth profile and growing dividend stream.

We use our proprietary investment process daily and in volatile market conditions such as these, we seek to ensure that we can manage downside risk and adjust the portfolio accordingly while seeking to achieve our long-term investment goals.

We remain invested and are committed to companies that provide revenue growth, improving free cash flow and higher earnings per share. We are active portfolio managers with a disciplined investment process including the implementation of various risk management tools to benefit our investors.


Kindest Regards,

Richard Stone,
Chief Investment Officer
Stone Asset Management Limited

FUND PERFORMANCE – Series F/FF 1 mo 3 mo 6 mo YTD 1 yr 3 yr 5 yr 10 yr Since Inception Inception Date
Stone Dividend Growth Class, Series F 1.2 0.1 8.7 13.5 4.7 7.9 5.2 8.5 9.6 08/01/2003
80% S&P/TSX Composite, 20% S&P 500 C$ 0.6 (0.3) 8.1 16.5 4.3 8.5 6.7 9.2 8.4  
Stone EuroPlus Fund, Series F (1.3) (5.3) 3.3 5.0 (3.0) 1.5 3.5 6.7 3.4 05/02/2008
Comparable European Equity Index $C (1.5) (3.0) 6.6 9.6 (2.3) 7.1 5.6 7.8 3.7  
Stone Global Balanced Fund, Series FF 0.1 (1.2) 6.8 9.6 3.5 5.2 5.8 7.9 8.2 01/05/2009
15% S&P/TSX Composite, 15% S&P 500 C$, 30% Comparable Global Equity Index C$ and 40% FTSE TMX Canada Universe Bond 0.7 0.8 7.7 11.7 6.8 7.0 6.7 8.2 8.7
Stone Growth Fund, Series F 1.3 (2.5) 6.7 9.9 1.2 9.0 7.1 8.4 6.5 08/01/2003
50% S&P/TSX Composite and 50% S&P 500 $C 1.1 (0.3) 9.3 16.4 6.1 10.0 7.6 9.7 8.1  
Stone Global Growth Fund, Series F 0.5 (2.8) 11.6 16.3 4.8 12.9 14.5 13.9 8.9 08/01/2003
Comparable Global Equity Index $C 0.9 (1.0) 9.1 13.5 4.7 10.6 11.2 12.1 7.5  
Stone Select Growth Class, Series F 1.5 (7.0) (2.7) (0.3) (16.2) (8.4) n/a n/a (14.4) 09/01/2014
50% S&P/TSX Capped Energy, 50% S&P/TSX Capped Materials (0.8) (3.5) 0.6 8.1 (14.9) (3.4) (5.4) (0.9) (5.8)  
Stone GaleForce Dividend Growth Pool 0.8 (0.2) 6.0 10.6 3.6 6.6 4.8 n/a 6.4 05/17/2012
Stone American Dividend Growth Fund Series F 1.3 (2.4) 4.1 6.1 (4.2) 2.2 6.3 n/a 6.2 07/17/2014
Stone Dividend Yield Hog Fund 0.6 (0.7) 4.6 10.2 (4.9) (1.0) (4.1) 4.1 1.7 02/07/2006
Stone Global Strategy Fund Series F 0.6 (1.9) 4.5 7.2 (2.2) 3.6 4.9 9.2 4.2 09/22/2006
Stone Covered Call Canadian Banks Plus Fund Series F 1.0 (1.2) 5.8 13.3 (0.6) 6.9 4.8 n/a 4.7 07/17/2014
Stone Small Companies Fund Series F (0.6) (6.2) (5.9) (3.7) (10.6) (6.0) (3.3) (0.4) (3.9) 02/07/2006
The returns set out above are historical annualized compounded returns net of all fund fees and expenses.  The returns assume a re-investment of all distributions.  Historic returns are provided for general information purposes only and may not be indicative of future returns or fund performance.  Performance data of other Series of the Funds may differ from those shown above due to differences in fees.  Please visit our website at for performance data of all Series.                          As at July 31, 2019

There are risks associated with investing in mutual funds. Please refer to the simplified prospectus or offering memorandum for details of the risks associated with these funds. The principal risks associated with the Stone Dividend Growth Class are market risk relating to fluctuations in the stock market and equity risk relating to fluctuations in individual securities. The principal risks associated with the Stone Global Balanced Fund are market risk relating to fluctuations in the stock market, equity risk relating to fluctuations in individual securities, credit risk associated with investments in bonds and interest rate risk associated with fluctuations in interest rates. The principal risks associated with the Stone Growth Fund are market risk relating to fluctuations in the stock market and equity risk relating to fluctuations in individual securities. The principal risks associated with the Stone Global Growth Fund are market risk relating to fluctuations in the stock market, equity risk relating to fluctuations in individual securities and foreign investment risk associated with investments in foreign companies.

All mutual funds carry the risk that the mutual fund may decrease in value. The degree of risk varies depending on the investment objective and strategies of the mutual fund. Before investing in any mutual fund discuss with your financial advisor how it works with your other investments and your tolerance for risk. Please refer to the simplified prospectus or offering memorandum for more information regarding the risks associated with these funds.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus or offering memorandum before investing. Any indicated rates of return are the historical annual compounded total returns including changes in security value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The payment of distributions is not guaranteed and may fluctuate. The payment of distributions should not be confused with a fund’s performance, rate of return, or yield. If distributions paid by the fund are greater than the performance of the fund, then your original investment will shrink.

Distributions paid as a result of capital gains realized by a fund and income and dividends earned by a fund are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, then you will have to pay capital gains tax on the amount below zero. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Information contained in this publication is based on sources such as issuer reports, statistical services and industry communications, which we believe to be reliable but are not represented as accurate or complete. Opinions expressed in this publication are current opinions only and are subject to change.

Stone Co