Client Letter

2022 Client Letter

Market Data for year-end 2021:

• S&P 500 Stock Index: 4766, up 26.9%
• Ten-year Treasury Note Yield: 1.51%, up 0.59%
• Gold: $1,829 per ounce, down 3.6%
• Oil: $75 per barrel, up 53%

Risk assets, such as stocks and commodities, surged in 2021 as the combination of continued overwhelming monetary stimulus from the Federal Reserve and a strengthening economy gave investors both the ammunition and confidence to continue pressing the attack in the Great Covid Financial Mania of 2020-22.  Defensive assets, such as investment grade bonds and gold, struggled in the fevered environment.

The winds began to change in the fourth quarter, however, principally on account of the Federal Reserve indicating it would accelerate the removal of the “emergency” monetary stimulus that has served as rocket fuel for speculative investments over the past two years.  The Fed’s change in tack was forced by price inflation that has proven to be stronger and longer lasting than they anticipated.

Our view is that the heightened inflation we are seeing is temporary in that it is driven by pent up consumer demand from last year’s restrictions and relief checks slamming into global supply chains weakened by the pandemic.  These are both dynamics that will likely ease in 2022.  Nonetheless, the Fed’s monetary emergency policy had become inappropriate for a normalizing economy, so we agree an acceleration in the removal of stimulus is warranted.

The upshot is that we see risk assets facing a more difficult financial environment in 2022.  Expensive high-flying mega-cap growth stocks are particularly at risk, along with more speculative assets such as crypto “currencies” and day trader-driven “meme” stocks.  As higher risk assets come under increasing pressure, we expect our more defensively oriented portfolios to make up ground lost during the last two years of financial mania.  Few are interested in a 3% annual dividend when high-flying growth stocks are returning ten-times that, at least.  However, when those robust returns inevitably turn into losses, the merits of stable return assets will become increasingly apparent to investors.

The number one wild card to our forecast continues to be the path of the pandemic.  Our laymen’s viewpoint is that with the passing of the current Omicron wave, Covid will fade as a both a public health and economic issue.  There is obviously no certainty to this forecast, so we would not be shocked if we end up being wrong.  If the public health situation deteriorates, the likely financial outcome would be a slower withdrawal of monetary stimulus by the Fed and perhaps a resulting second wind for expensive growth-oriented assets.

For 2022, we see US stocks, as represented by the S&P 500 stock index, trading in a range of 4300 to 5200.  (It ended 2021 at 4766.)  We think a combination of slower economic growth and lower inflation will keep the Ten-year Treasury pinned below 2% (currently 1.51%).  Slower economic growth will likely lead to lower commodity prices, including oil, while we see gold little changed.

As always, we appreciate your business and 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 healthy and prosperous 2022.

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

For the tenth 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 2021 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, Anita, 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.

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.