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January Monthly Market Commentary & Forecast

Date: February 13, 2018

The markets exploded out of the gates in 2019 after the Fed-induced aggressive sell off throughout Q4 of 2018.  The MSCI World index jumped by 7.7% led by a stellar 7.9% gain in the S&P 500 and 7.2% in the Dow Jones.  This is the best January for the US markets since 1987, a somewhat-interesting benchmark year. The TSX finally broke out of its slump with an emphatic 8.5% gain.  Every TSX sub index was up for the month with the heavily weighted financials up 8.0% and energy up 10.6%.  Stocks and bonds both rallied which is an atypical pattern.  The yield on the benchmark US 10-year Treasury note has fallen for three consecutive months settling at 2.69%, down from a high of 3.23%.

Federal Reserve chair Jerome Powell has recently made a complete turn on his auto-pilot dual (quantitative tightening and raising rates) stance of 2018 to an extended pause in the new year.  North America has experienced a deep freeze both in the weather as well as on further interest rate increases.  This milder version of the FOMC has ignited the spirited recovery across all markets.    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, technical recession in Italy, cooling in China and slippage in US’s domestic demand have all contributed to the wave of disappointing global economic data.

After the gut-wrenching declines in the final quarter of 2018, we believe that the markets will now go back to focusing on corporate earnings for the upcoming Q4/18 earnings season for 2019.  After Apple’s pre-release of weaker global iPhone sales, our focus will be to see the earnings impact on other companies.  We do not expect Apple to be the canary in the coal mine, Apple’s issues are systemic. The S&P 500 has had to revise down its earnings growth estimates for 2019 given the recent weakness in macro-economic headlines such as the widespread drop in purchasing managers’ indexes.

Some companies have already pre-announced Q4/18 cautious outlooks or earning warnings.  Caterpillar, which makes heavy equipment used in mining and construction, missed analysts’ Q4 expectations and lowered their forward guidance for 2019.  Nvidia, which makes computer chips, also pre-warned of lower Q4 numbers and cut its outlook for 2019.  Both companies cited deteriorating macroeconomic conditions, particularly in China.


Market Return (%)*
Canada (S&P/TSX) 8.7
US (S&P) 3.9
MSCI (World) 3.6
Best (Argentina) 16.5
Worst (India) (5.1)

*In Canadian dollar terms as at January 31, 2019

Do these three companies represent a concerning trend and resulting risk of an earnings “recession”?  Or is it just the case that corporate earnings were already too high and must be “reset” to more reasonable levels?  We believe in the latter as the pre-warnings are merely one-offs on the road to acceptable earnings reports.  Let’s look at the Q4/18 numbers thus far.  Of the 238 companies that have reported so far in the S&P 500, 71% reported earnings above expectations and 61% above revenue expectations.  The overall earnings represent a strong 15.4% growth rate versus the same period in 2017.  Revenue growth was also positive at 5.7% growth.  Growth is still positive but it remains to be seen how much damage the China-US trade war, US government shutdown, Republican/Democrat policy position fights and weaker consumer confidence will have on global economic growth.  We believe that the future 2019 earnings will be “reset” to the mid-single digit growth rates in the 3 to 6% range. This is a decline from double-digit growth rates experienced in 2018.

The charts below show the revised slowdown in quarterly and annual earnings outlooks “reset” for 2019 compared to 2018.

For the 2018 year, earnings are expected to increase 23.7% vs 2017.  Concern about future earnings growth for 2019 has seen estimates decline from October’s target of 10.2% for 2019 to a current expectation of 4.8% growth.  This is made up of 2019 quarterly growth rates of 0.5% for Q1, 3.75% Q2, 3.2% Q3 and 10.4% Q4.  Note that the big boost for 2019 is heavily weighted to Q4 when visibility is not as clear as the closer dates.  Overall, the corporate earnings will be “reset” from loftier growth levels of 2017 and 2018 but still showing growth.

SAM raised cash in Q4 2018 and our portfolios have been structured as more defensive compared to the index. We increased the cash weighting in our Growth Fund from a low single digit percentage to 15%.  We also slightly increased our cash weighting in Dividend Growth Class, GaleForce Dividend Growth Pool and Select Growth Class. Yes, we missed not being fully invested during January’s recovery. Our goal is to first, preserve investors’ capital and second, provide appropriate risk-adjusted returns.

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, higher earnings per share and improving free cash flow. 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 4.4 0.4 (3.8) 4.4 2.5 7.6 5.5 9.6 9.3 08/01/2003
80% S&P/TSX Composite, 20% S&P 500 C$ 7.8 3.5 (3.5) 7.8 1.3 10.2 7.5 10.5 8.2  
Stone EuroPlus Fund, Series F 1.7 4.1 (6.2) 1.7 (8.5) (0.2) 3.4 7.5 3.3 05/02/2008
MSCI Europe $C 2.8 0.6 (8.3) 2.8 (8.1) 4.4 4.9 8.8 3.3  
Stone Global Balanced Fund, Series FF 2.6 2.1 (3.1) 2.6 (1.1) 3.9 5.1 8.6 8.0 01/05/2009
15% S&P/TSX Composite, 15% S&P 500 C$, 30% MSCI World C$ and 40% FTSE TMX Canada Universe Bond 3.7 2.4 (0.8) 3.7 2.2 7.4 6.8 8.8 8.4  
Stone Growth Fund, Series F 3.0 (1.4) (5.1) 3.0 3.8 5.4 7.9 9.6 6.3 08/01/2003
50% S&P/TSX Composite and 50% S&P 500 $C 6.5 2.2 (2.9) 6.5 2.4 11.4 8.2 10.9 7.8  
Stone Global Growth Fund, Series F 4.3 0.6 (6.1) 4.3 0.4 8.9 11.8 14.5 8.4 08/01/2003
MSCI World $C 4.0 0.6 (4.0) 4.0 (0.3) 8.9 10.6 12.2 7.1  
Stone Select Growth Class, Series F 2.4 (4.1) (13.8) 2.4 (19.0) (2.8) n/a n/a (15.4) 09/01/2014
50% S&P/TSX Capped Energy, 50% S&P/TSX Capped Materials 7.4 1.3 (15.4) 7.4 (8.8) 8.7 (3.0) 1.1 (6.5)  
Stone GaleForce Dividend Growth Pool 2.7 1.6 (2.2) 2.7 3.3 7.3 5.5 n/a 5.9 05/17/2012
Stone American Dividend Growth Fund Series F 2.0 (2.9) (7.9) 2.0 (6.7) 3.4 n/a n/a 6.0 07/17/2014
Stone Monthly Pay Fund 5.4 (3.3) (9.1) 5.4 (10.0) (3.7) (3.5) 5.8 1.4 02/07/2006
Stone Global Strategy Fund Series F 2.5 (0.2) (6.4) 2.5 (2.7) 4.5 5.0 10.3 4.0 09/22/2006
Stone Covered Call Canadian Banks Plus Fund Series F 7.0 0.3 (6.1) 7.0 (7.7) 7.5 n/a n/a 3.9 07/17/2014
Stone Small Companies Fund Series F 2.4 (4.0) (5.0) 2.4 (14.0) 1.9 (2.5) 1.8 (3.5) 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 allSeries.                                                                                                                                

As at January 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