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March Monthly Market Commentary & Forecast

Date: March 11, 2019


The markets have experienced a “snakes and ladders” type ride over the past six months.  The S&P 500 went from record highs in the fall of 2018 to the cusp of a bear market by Christmas Eve and back within striking distance of its peak in the new year.  The MSCI World Index jumped another 1.05% in March bringing it up 11.89% for the first quarter.  This was once again led by a stellar 1.79% gain in the S&P 500 in March, and 13.07% for the quarter.  The Dow Jones was held back with a 0.05% gain in March due to the fall in Boeing shares but was still up 11.15% for the quarter.  The S&P has had it best first quarter since 1998!  The TSX added to its yearly winning streak with a gain of 0.64% in March and 12.42% for the quarter.  The lower interest rate environment had a positive impact on the interest-sensitive sectors such as utilities (+4.26%) and real estate (+3.44%) while having the opposite effect on financials (-1.41%), consumer discretionary

(-1.43%) and energy (-0.90%).  Once again, Asian markets were on fire with China’s Shanghai Composite up another 5.09% in March taking its YTD gain to 23.93%.  These Chinese market gains resulted even in the face of continual US-China trade negotiations and downward GDP growth revisions.  The yield on the benchmark US 10-year Treasury note plummeted to 2.41%, down 27 bp for the year and down from a high of 3.23% in the fall of 2018.

Federal Reserve Chair Jerome Powell has recently made a policy pivot on his auto-pilot tightening stance of 2018 to an extended pause in the new year.  North America has experienced a freeze on further interest rate increases and this has spread globally.  This milder version of the FOMC has brought back the TINA theme, There Is “No Alternative”, across all markets as plummeting interest rates are less competition for equities.    In recent months, signs of weakening growth in China, the US and Europe have helped drag treasury yields lower.  The Fed has concerns across several baskets such as slower global economic growth, lower inflation expectations, tighter financial conditions and policy uncertainty.  The most important item is slower global economic growth as the weak PMI in Europe, cooling in China and slippage in the US’s domestic demand have all contributed to the wave of disappointing global economic data.  Some economists are now thinking the next rate move can be a cut rather than an increase.  Bank of Canada’s Stephen Poloz is facing an even bleaker picture for the Canadian economy.  Fading competitiveness due to an over-dependence on natural resources, a growing trade spat with China and an overleveraged consumer are forcing Poloz to join other central bankers on the sidelines.


Market Return (%)*
Canada (S&P/TSX) 1.0
US (S&P) 3.3
MSCI (World) 2.4
Best (India) 11.8
Worst (Argentina) (11.1)

*In Canadian dollar terms as at March 31, 2019

Investors’ cautiousness has driven them to seek the safety of US government bonds, especially with earnings estimates bleeding lower for 2019 and exogenous event risks such as Brexit-linked disruptions and trade risks.

The yield curve had inverted by the end of March, for the first time since 2006, as short-term rates were higher than long-term rates.  This is usually a precursor to an economic downturn as evidenced by the S&P 500 dropping 2% on the day the yield curve inverted on March 22.  The 10-year Treasury had fallen below the three-month T-bill yield for five consecutive trading days in late March, spurring concerns about the pace of economic growth and the risk of a future contraction.  We have subsequently seen the inverted yield curve reverse itself on promising manufacturing and economic numbers.  Investors will be watching the upcoming economic data closely with a laser focus after dismal numbers thus far and the above recessionary warning signals from US Treasury yields.  After the longest US government shutdown on record and a late 2018 equities collapse, investors are hoping for a clearer view.

The recession link to yield inversion is not always a given.  In fact, the yield curve did not invert in six recessions from 1935-1960 (see figure #1).   In addition, there are many unusual characteristics of the current economic cycle and the global macro backdrop that warrant careful review.  This decades-long cycle has had stubbornly low inflation compared to other late-cycle macro environments.

Figure #1


Warren Buffet recently said, “the lower bond yields go; the more attractive stocks are as a long-term investment”.  This likely explains the resilience and strength of equities we have witnessed year to date.  But what level of equity valuation makes sense?  Another theme also kicks in, FOMO, Fear of Missing Out.  The “fear of missing out” is driving investors to buy equities as they march higher.  Lower interest rates and renewed deflationary pressures should provide room for multiples to re-rate higher.  History shows that there is a negative correlation between interest rates and equity multiples and stock market performance.  Figure #2 shows this staggering inverse correlation.  A 100bp decline in rates has resulted in the S&P 500 gaining about 10% within a year, and multiples rating higher accordingly.  Looking at 2020 forecast EPS numbers for the S&P 500 of $181, the market is pricing in under 16x PE.  This is not necessarily a high level given the low interest rates as an alternative.

Figure #2

Our cash level has stayed the same and our portfolios have been structured as more defensive compared to the index.  We believe the best way to invest in markets as these is to have a total return mandate.  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 1.5 9.6 (0.3) 9.6 8.3 8.4 5.5 10.0 9.5 08/01/2003
80% S&P/TSX Composite, 20% S&P 500 C$ 1.5 13.0 1.8 13.0 9.2 10.4 7.4 11.0 8.4  
Stone EuroPlus Fund, Series F 2.9 9.0 3.6 9.0 1.1 4.0 3.8 8.3 3.9 05/02/2008
Comparable European Equity Index $C 2.2 8.7 (0.1) 8.7 (0.2) 7.6 5.0 9.6 3.8  
Stone Global Balanced Fund, Series FF 2.9 8.5 2.0 8.5 4.9 6.1 5.8 9.2 8.4 01/05/2009
15% S&P/TSX Composite, 15% S&P 500 C$, 30% Comparable Global Equity Index C$ and 40% FTSE TMX Canada Universe Bond 2.5 8.4 3.1 8.4 7.9 8.2 7.1 9.1 8.7
Stone Growth Fund, Series F 2.7 8.3 (2.7) 8.3 10.3 9.2 8.1 10.4 6.6 08/01/2003
50% S&P/TSX Composite and 50% S&P 500 $C 2.3 12.4 1.7 12.4 10.8 11.8 8.3 11.4 8.0  
Stone Global Growth Fund, Series F 3.9 13.8 (0.4) 13.8 8.8 13.4 13.1 15.4 9.0 08/01/2003
Comparable Global Equity Index $C 2.9 10.4 0.6 10.4 7.9 11.8 10.9 13.0 7.4  
Stone Select Growth Class, Series F (1.5) 5.4 (9.8) 5.4 (11.9) (3.9) n/a n/a (14.3) 09/01/2014
50% S&P/TSX Capped Energy, 50% S&P/TSX Capped Materials 0.2 10.4 (5.4) 10.4 8.1 4.5 n/a n/a (5.7)  
Stone GaleForce Dividend Growth Pool 0.9 8.0 0.2 8.0 7.4 7.5 5.3 n/a 6.3 05/17/2012
Stone American Dividend Growth Fund Series F 0.3 4.7 (6.2) 4.7 (1.6) 4.5 n/a n/a 6.4 07/17/2014


Stone Monthly Pay Fund 2.4 9.2 (7.1) 9.2 (4.5) (0.1) (3.0) 6.2 1.7 02/07/2006
Stone Global Strategy Fund Series F 1.4 5.0 (3.0) 5.0 3.6 4.5 4.6 10.9 4.2 09/22/2006
Stone Covered Call Canadian Banks Plus Fund Series F (0.6) 9.2 (3.9) 9.2 (2.2) 7.1 n/a n/a 4.2 07/17/2014
Stone Small Companies Fund Series  0.4 9.1 (1.8) 9.1 2.0 2.4 (1.1) 2.6 (3.1) 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 March 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