Client Letter

2021 Client Letter

Market Data for year-end 2020:

• S&P 500 Stock Index: 3756, up 16.2%
• Ten-year Treasury Note Yield: 0.92%, down 1.00%
• Gold: $1,898 per ounce, up 24.6%
• Oil: $49 per barrel, down 20.5%

Financial assets advanced powerfully across the board in 2020, as the Covid-19 pandemic drove unprecedented central bank easing and a record surge in the personal savings rate of investors.  Between aggressive action by global central banks to inject liquidity into the financial system and investors forced to save money for lack of opportunities to spend it, markets were flooded with cash, levitating stocks, bonds, and gold. Along the way, two exogenous events helped pave the way for markets’ relentless advance: (i) a peaceful resolution to the US Presidential election, and (ii) the development of multiple vaccines with effectiveness rates better than anyone could have hoped for.  Low interest rates and the heavy participation of homebound retail investors particularly boosted the shares of glamourous technology companies.  To wit, the Nasdaq outperformed the Dow Industrials by 36% (43 vs 7%).

Moving into 2021, we expect more muted gains.  As a starting point, stock valuations, particularly in tech shares, are near record highs only exceeded by the top of the Dotcom bubble in 1999/2000.  In the meantime, Treasury bond/note interest rates (yields) are near record lows.  Starting with high valuations and not having the potential benefit of significantly lower interest rates as a tailwind, we do not see stocks being able to put in another double-digit return performance.

A potential point of difficulty is that investors likely expect more from stocks, and reconciling their expectations with reality could lead to increased volatility and lower prices.  Risk factors that could catalyze this process could be a slower than expected economic “reopening” due to difficulties in controlling the virus, or conversely, a more rapid economic recovery that leads to substantially higher Treasury bond/note yields.  The latter risk factor would become more pronounced if the Democrats are able to take control of the Senate and enact more aggressive fiscal spending to include significant infrastructure investment.

Given the above points, we see the US stock market as represented by the S&P 500 stock index, trading in a range of 3300 to 4100 (it ended 2020 at 3756).  Without knowing how the economic recovery plays out and the political composition of the Senate (although we will know after January 5th), it is difficult to forecast the path of Treasury bond/note interest rates.  Gold is traditionally sensitive to interest rates, so we would expect it to track the inverse of the movement in interest rates.

We view our portfolio of high-quality dividend growth stocks having a superior risk return profile this year, as its starting valuation is substantially lower than those of the massive tech stocks that led the market in 2020, and is not significantly exposed to fluctuations in the economy.

We appreciate the business you have given us. We thank you for the continued confidence you have placed in us. Please do not hesitate to contact us with any questions or concerns you may have. We wish you a very healthy and prosperous 2021.

Sincerely,
Patrick Mauro, Daniel Mauro, Anita Mauro, Henry Criz

For the ninth year running, we are pleased to have been named a Five-Star Wealth Manager as described in Chicago Magazine. A detailed description of the award can be found in the November 2020 issue of Chicago Magazine.  More details are available at Fivestarprofessional.com

Privacy notice:

Patrick Mauro Investment Advisor, Inc. (PMIA) is a registered investment advisor registered with and regulated by the Securities and Exchange Commission, Washington, DC. PMIA must collect certain nonpublic information regarding your financial assets and net worth. We must do this to help you develop a mandate in managing your account. This information and any other information for which you disclose to PMIA for the purposes of granting access to your brokerage account is treated this way:  PMIA discloses this information to no one else, that is to no third party. Your information is kept confidential and secure at the corporate office of record, 38 Mockingbird Lane, Oak Brook, IL 60523.

Part 2A, Form ADV:

Every client should know that Rule 204-3 under the Investment Advisers Act of 1940 imposes disclosure delivery obligations on investment advisers. Each year, PMIA offers each client through this letter Part 2A of its Form ADV. This disclosure document may be obtained by writing PMIA and requesting a copy be mailed to you, or it may be found on our website at: www.mauroinvestor.com. A firm brochure and supplemental brochures for Daniel and Henry can be requested as well.

Form CRS:

The Relationship Summary (Form CRS) is subject to Rule 17a-14 under the Securities Exchange Act of 1934 and Investment Advisers Act Rule 204-5, which imposes delivery obligations of the relationship summary on investment advisers. PMIA offers each client through this letter Form CRS. This relationship summary may be obtained by writing PMIA and requesting a copy be mailed to you, or it may be found on our website at www.mauroinvestor.com.

2020 Client Letter

Market Data for year-end 2019:

• S&P 500 Stock Index: 3231, up 28.9%
• Ten-year Treasury Note Yield: 1.92%, down 0.76%
• Gold: $1,523 per ounce, up 18.9%
• Oil: $61 per barrel, up 35.6%

Virtually every major investment asset class, from stocks and bonds to real estate and commodities, advanced strongly in 2019, as increased global central bank liquidity measures, and a seeming truce in the US-China trade war to end the year, provided a rising tide that lifted all boats. The strong gains were further enabled by the low starting point of December 31, 2018, a year where the converse was true: nearly all asset classes were depressed due to market fears of constricted liquidity and an escalation in trade hostilities. The stocks that performed the strongest in 2019 tended to be the ones that were hit the hardest in 2018, so our more defensive posture in stocks led to a moderate underperformance in stock portfolios in 2019 relative to a solid outperformance in 2018.

For the coming year, we expect further gains in stocks, although not nearly of the same magnitude of 2019 given that the market is beginning the year at all time highs, and not at the end of a major correction, as was the case for the year just passed. We are presented with moderate economic growth, low inflation, and accommodative central bank policy. This set of fundamental conditions has traditionally been an environment that is supportive of higher share prices, as witnessed by the previous decade.

As always, there are caveats to this benign forecast. We see two distinct risks that could send shares lower in the coming year: trade war reescalation and geopolitical risks.

The truce in the US-China trade war may not hold. The ongoing trade hostilities between the world’s two largest economies have created a high degree of uncertainty for the global industrial and technological supply chain, thus suppressing corporate investment. As mentioned above, a de-escalation of the trade war to close out the year was a major factor in driving 2019’s outsized gains. Both the Trump Administration and the Chinese government say they have arrived at a “Phase 1” deal that involves no further import tariffs and the modest rollback of some that were already on the books. The phase one deal does not cover any of the most contentious issues between the two economies, e.g. industrial subsidies and forced technology transfers, so arriving at a “phase two” deal will be more fraught. If the President feels frustrated that the Chinese are not negotiating in good faith, he may go back on the tariff war path, creating further uncertainty and sending stocks lower.

On geopolitical risks, America’s relationships with both Iran and North Korea have deteriorated over the course of 2019. On Iran, the US left the international nuclear deal with Iran in 2018 and unilaterally imposed crippling economic sanctions. Iran has felt the need to resist and in 2019 engaged in multiple aggressive actions, from seizing Western oil tankers to attacking a Saudi Arabian oil processing facility. In both cases, the Trump Administration did not respond in a forceful manner. Because of this, the Iranians believe they have the initiative and are likely to further seek to provoke the United States. While we strongly believe President Trump does not want a war in the Middle East while running for reelection, miscalculations on either side are always possible. A shooting war with Iran would likely send oil prices sharply higher and, consequently, share prices lower.

Concerning North Korea, the “bromance” between President Trump and the brutal North Korean dictator Kim Jong-un appears to have been put on ice. While having agreed to a nuclear weapons and ICBM test moratorium in exchange for the suspension of US-South Korea military drills, North Korea has continued to develop and expand its nuclear arsenal. Frustrated that the Trump Administration does not seem to be willing to offer further concessions at this time, particularly on economic sanctions against North Korea, Chairman Kim has said he no longer feels bound by any earlier agreements and has suggested a recommencement of weapons tests is imminent. This could anger the President and may lead to a further escalation in hostilities between the two sides. Once again, while we feel confidently that the President does not want a war during an election year, miscalculations are possible.  A war on the Korean Peninsula would result in significantly lower share prices.

Given the above points, our attitude could best be described as cautious optimism. For 2020, we see the US stock market, as represented by the S&P 500 stock index to trade in a range of 3000 to 3600. It closed 2019 at 3231. We see interest rates moving modestly higher and expect gold to continue to advance on the back of a weaker US dollar, as a solid global economy in 2020 will likely lead to the relative strengthening of foreign currencies and commodities.

We appreciate the business you have given us. We thank you for the continued confidence you have placed in us. Please do not hesitate to contact us with any questions or concerns you may have. We wish you a very healthy and prosperous 2020.

Sincerely,
Patrick Mauro, Daniel Mauro, Henry Criz

For the eighth year running, we are pleased to have been named a Five-Star Wealth Manager as described in Chicago Magazine.  A detailed description of the award can be found in the November 2019 issue of Chicago Magazine.  More details are available at Fivestarprofessional.com

Privacy notice:

Patrick Mauro Investment Advisor, Inc. (PMIA) is a registered investment advisor registered with and regulated by the Securities and Exchange Commission, Washington, DC. PMIA must collect certain nonpublic information regarding your financial assets and net worth. We must do this to help you develop a mandate in managing your account. This information and any other information for which you disclose to PMIA for the purposes of granting access to your brokerage account is treated this way:  PMIA discloses this information to no one else, that is to no third party. Your information is kept confidential and secure at the corporate office of record, 38 Mockingbird Lane, Oak Brook, IL 60523.

Part 2A, Form ADV:

Every client should know that Rule 204-3 under the Investment Advisers Act of 1940 imposes disclosure delivery obligations on investment advisers. Each year, PMIA offers each client through this letter Part 2A of its Form ADV. This disclosure document may be obtained by writing PMIA and requesting a copy be mailed to you.  A firm brochure and supplemental brochures for Daniel and Henry can be requested as well.

2019 Client Letter

Market Data for year-end 2018:

• S&P 500 Stock Index: 2507, down 6.3%
• Ten-year Treasury Note Yield: 2.68%, up .27%
• Gold: $1,281 per ounce, down 2.1%
• Oil: $45 per barrel, down 24.3%

increased investors’ sense of uncertainty, pressuring returns across almost all major asset classes. Stocks and corporate bonds had their worst annual performance since 2008, while basic commodities such as oil and copper experienced significant declines. Compared to the historic placidity of 2017, US stocks had two major corrections of greater than 10% in 2018.

The factors pressuring markets alluded to above are primarily threefold:

  1. Economic and corporate profit growth are decelerating. 2018 began with economies around the globe experiencing a synchronized expansion. In the US, economic growth and corporate profits surged on the back of the Trump/GOP corporate tax cut and increased federal spending. As 2018 came to a close, however, economic growth in the major economies of Europe and Asia was faltering, while US economic and corporate profit growth were projected to decrease substantially as the stimulus from the tax cuts and increased spending began to wear off. US economic growth in 2018 was approximately 3% in 2018, yet is expected to decelerate to 2.5% in 2019, and 2% in 2020. Similarly, corporate profits are seen decelerating from growth of 22% in 2018 to 8% in 2019.
  2. Liquidity (money available for lending/investment) in the financial system is being removed. The US Federal Reserve raised its target for the federal funds overnight interest rate a full percentage point in 2018 to over 2.25%. At the same time, it is effectively liquidating the substantial bond portfolio it accumulated during the post-crisis policy of “quantitative easing”, thus increasing the supply of debt on the market while simultaneously withdrawing funds from the banking system. Further compounding the liquidity draining activities of the Federal Reserve, the US Treasury is having to significantly increase its issuance of bills, notes, and bonds to finance the above cited tax cuts and increased spending. This all has the net effect of decreasing the funds available for private lending and investment.
  3. Trade tensions are suppressing corporate investment. In 2018, President Trump followed through on his promise to initiate trade wars on US trading partners. He began by putting on an across the board tariff on all aluminum and steel imports and then a 10% tariff on over $200 billion of goods from China. He has also held out the threat of further tariffs on Chinese imports and European automobiles, as well. Given the highly integrated nature of the global industrial supply chain, such threats are substantially disruptive, creating uncertainty for corporate executives, and decreasing corporate investment. Ultimately, decreased trade leads to higher prices and lower economic output, a lose-lose situation for all involved.

Whether or not 2019 turns out to be a better year for financial markets hinges primarily on the actions of the Federal Reserve and the trade agenda of President Trump. As the US economy is already decelerating, the market does not believe further monetary policy tightening is necessary. The Fed said in December that it sees itself raising the overnight interest rate a further half of a percentage point in 2019 and continuing to sell bonds from its portfolio. If they stick with their stated agenda, there is an elevated likelihood of an economic recession and lower share and corporate bond prices. Similarly, if President Trump cannot de-escalate the trade tensions he has injected into the global economy, we would expect corporate investment and global growth to continue to suffer, leading to further decreases in the prices of risk assets such as stocks and corporate bonds. Speaking more broadly, the President’s erratic behavior has become a distinct source of concern for the markets beyond any specific policy item.

We are admittedly agnostic on the points discussed above. The Federal Reserve has a poor track record of managing a decrease in liquidity without causing a recession, while President Trump’s inherent instability makes predictions on the outcome of the trade wars a highly fraught endeavor. In such an environment, we will stick to our strategy of focusing on investments in high quality companies, diversification, value, and patience. Such a strategy held up well in 2018, and we are confident in its continued performance regardless of the macroeconomic environment. For the remainder of the year we expect the US stock market, as represented by the S&P 500 stock index, to trade in a range of 2200to 2800. It closed 2018 at 2507.

As always, we thank you for the trust and confidence you have placed in us. Please do not hesitate to contact us with any concerns you may have. We wish you a healthy and prosperous 2019.

Sincerely,
Patrick Mauro, Daniel Mauro, Henry Criz

For the seventh year running, we are pleased to have been named a Five-Star Wealth Manager as described in Chicago Magazine.  A detailed description of the award can be found in the November 2018 issue of Chicago Magazine.  More details are available at Fivestarprofessional.com

Privacy notice:

Patrick Mauro Investment Advisor, Inc. (PMIA) is a registered investment advisor registered with and regulated by the Securities and Exchange Commission, Washington, DC. PMIA must collect certain nonpublic information regarding your financial assets and net worth. We must do this to help you develop a mandate in managing your account. This information and any other information for which you disclose to PMIA for the purposes of granting access to your brokerage account is treated this way:  PMIA discloses this information to no one else, that is to no third party. Your information is kept confidential and secure at the corporate office of record, 38 Mockingbird Lane, Oak Brook, IL 60523.

Part 2A, Form ADV:

Every client should know that Rule 204-3 under the Investment Advisers Act of 1940 imposes disclosure delivery obligations on investment advisers. Each year, PMIA offers each client through this letter Part 2A of its Form ADV. This disclosure document may be obtained by writing PMIA and requesting a copy be mailed to you.  A firm brochure and supplemental brochures for Daniel and Henry can be requested as well.