Client Letter

2024 Client Letter

Market Data for Year-End 2023:

• S&P 500 Stock Index: 4770, up 24.2%
• Ten-year Treasury Note Yield: 3.87%, down 0.01%
• Gold: $2,072 per ounce, up 13.6%
• Oil: $71 per barrel, down 10.8%

2023 produced standout gains for the S&P 500, mostly on the back of explosive moves in large, glamorous technology companies (although returns for the index did broaden out to other sectors of the market in the final two months of the year.)  Bond yields, although little changed on the year, went on a rollercoaster ride compelled by ever shifting investor attitudes regarding the outlook for economic growth and inflation.  Gold benefited from the general drift higher in asset prices, while oil was down on the year due to moderating global economic growth along with record production from US shale drillers.

We can identify three primary underlying themes that drove share prices in 2023.  The first was an unwavering investor belief that the US Federal Reserve would inevitably return to a market stimulating “easy” monetary policy.  The second was a textbook “New Era” speculative mania over artificial intelligence.  Last, but certainly not least, was investors’ fear of missing out on spectacular returns, often referred to by its acronym “FOMO.”

Noticeably absent in all of the above was any regard for what stocks are actually worth.  What passes for “investing” in today’s market is chasing lines on a chart and telling stories to rationalize it.  Unfortunately for those who engage in such naiveté, it is an inescapable law of investing that price and value inevitably converge because if they did not, asset prices would spiral into a state of absolute absurdity.  For instance, there’s a reason why tulip bulbs today cost no more than fifty cents rather than hundreds of millions of dollars, and that the darlings of the Dotcom bubble of the late 1990s are not worth hundreds of trillions of dollars.

This being the case, the question is when, not if, the current market obsession with lines and stories comes crashing back to physical reality here on planet Earth.  We do not have a precise answer of course, but our conservative approximation would be sometime within the next three years, which is well within the investment timeframe of your stock portfolios.  While the Federal Reserve is certainly biased toward accommodating a state of perpetual speculative mania, they are neither omniscient nor omnipotent and their ability to levitate markets in the manner of the past decade is not what investors believe it to be.

Since 2008, the Federal Reserve has increased the supply of dollars in circulation from 5% of US gross domestic product (GDP) to 30% today.  They accomplished this primarily by using money conjured out of thin air to purchase US Treasury securities and mortgages guaranteed by the Federal government.  As the recent bout of price inflation has demonstrated, there is an upper bound to this largesse, and the idea that the Fed will be able to increase the supply of dollars at such a rate moving forward simply is not credible.

Distorted by the “easy” monetary policy described above, current asset prices are unsustainable. When the inevitable correction comes, sizable losses are likely for the glamorous assets of the current mania while solid returns are likely for those which were punished for lacking said glamour.  In other words, investors will wake up to the fact that we live in a world of single digit growth and realize their expectations for endless returns well into the double and even triple digits were a fantasy.  This will likely lead to a reevaluation, appreciation, and substantially higher share prices for the shares of companies that reliably grind out cash flow and dividends, such as those found in your portfolio.

As far as exogenous risk factors are concerned, the one we believe to be least appreciated is the potential for political instability and violence accompanying the 2024 Presidential election.  This is by no means a certainty, but the events of January 6, 2021 demonstrate that it is a very real possibility.  Given the further poisoning of national politics in the years since, more of such violence and on a much wider scale is a distinct possibility.  That having been said, even if such an outcome were to come to pass, never underestimate the ability of American investors to ignore the outside world and remain safely within their speculative bubbles.  For example, the US stock market continued to rally on the very day the US Capitol was being ransacked…  “What me worry?”

In 2024, we expect the US stock market, as represented by the S&P 500 stock index, to trade in a range of 4100 to 5300.  (It finished 2023 at 4770).  While US markets are currently enjoying considerable momentum and the US economy continues to grow solidly in the context of inflation that is moderating toward the Federal Reserve’s 2% target, investor sentiment and economic fundamentals can certainly change.  Given the inherent fragility in market prices and potential political instability described above, 2024 could witness much higher levels of volatility than 2023, which explains the wide range of our forecast.

As always, we appreciate your business and the confidence you have placed in us and hope you have a happy, healthy, and prosperous 2024.  Please do not hesitate to contact us if you have any questions regarding your investments.

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

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.

2023 Client Letter

Market Data for year-end 2022:

• S&P 500 Stock Index: 3840, down 19.4%
• Ten-year Treasury Note Yield: 3.88%, up 2.37%
• Gold: $1,824 per ounce, down 0.3%
• Oil: $80 per barrel, up 6.7%

Both stocks and bonds suffered significant losses in 2022, as persistent inflationary pressure forced the US Federal Reserve to raise their benchmark overnight interest rate much more than investors expected at the end of 2021 (4.25% actual vs .75% expected). This outperformance of expectations by the Fed dealt a particularly severe blow to speculative assets, such as previously high flying “growth” stocks and crypto “currencies.” These assets were inflated to extreme, if not outright ludicrous, valuations by the Federal Reserve’s previous wildly over-stimulative post-Covid monetary policy in conjunction with massive “emergency” fiscal stimulus from the Federal government.

Unfortunately, these excesses in policy created an excess of consumer demand that helped push price inflation to four-decade highs. While Covid-related supply chain disruptions and Russia’s war in Ukraine also contributed to inflation, the primary culprit was an over-stimulated US economy. There are only two ways to deal with such a demand-driven inflation: (1) tightening monetary policy and/or (2) fiscal (taxation and spending) policy. Fiscal policy tightened in 2022 by virtue of Covid-related spending rolling off, while the Fed increased interest rates and slowed growth in the overall money supply.

As the huge run up in the price of risk assets in 2020-21 was aided heavily by inflationary governmental policies, it was almost axiomatic that the withdrawal of said policies would result in a retrenchment with the most speculative assets suffering the worst losses. The corollary to this phenomenon is that those assets which were not heavily assisted by government stimulus experienced relatively muted losses. As you will see in your rates of return, this proved to be the case with our high-quality, dividend growth strategy.

Moving forward, the single biggest driver of market performance will continue to be the evolution of Federal Reserve monetary policy. We do expect that the Fed will refrain from further policy tightening at some point in 2023. The uncertainty, however, is not only when, but also at what level of price inflation. This depends on the ongoing strength of the economy versus the Fed’s tolerance for an increase in unemployment, which is necessary to drive inflation down toward their professed 2% target. We have always felt that the Fed would likely settle for an inflation rate above 2% to avoid significant levels of unemployment. This being the case, the real question in our mind is when will the core rate of inflation settle into an “acceptable range of three to four percent versus today’s 5%?

The sooner this happens, the better it will be for asset markets. Over the longer-term, however, the Fed accepting a higher level of inflation implies higher long-term interest rates and lower valuations for stocks, particularly “growth” stocks that pay a marginal to non-existent dividend. With corporate bonds yielding five to six percent, as opposed to the three to four percent of the past decade, investors will be much less interested in owning stocks that do not provide a competitive income stream. Accordingly, our dividend growth-centric strategy is particularly well positioned for the years ahead.

Beyond Federal Reserve policy, there are other factors that could significantly impact asset prices in 2023. These include the path of the pandemic, the war in Ukraine, and the possibility of a debt ceiling “crisis” in Washington. Concerning Covid, China’s rapid emergence from their “zero-Covid” strategy has the potential to upend activity in their own economy, while potentially unleashing a new wave of infections upon the rest of the world. We will not handicap this further other than to say we are following the situation. Regarding the ongoing war in Ukraine, a significant escalation in hostilities between NATO and Russia would almost certainly send a wave of fear through markets. Once again, we are not making any specific predictions, but will continue to follow developments closely.

We do have a relatively higher degree of certainty that there will be some sort of brinksmanship involving the raising of the Federal government’s “debt ceiling” sometime in the fall. It is no secret that the incoming Republican controlled House of Representatives is looking to make mischief for the Biden administration, and threatening to cause a default on the US national debt is certainly the most powerful weapon in their arsenal. Such a default would be catastrophic for financial markets as US Treasuries are the bedrock of global finance. These showdowns were common during the Obama administration and never led to an actual default, so perhaps investors aren’t taking the current threat seriously. Be that as it may, we’ll see how they feel about it when they come face-to-face with the prospect of a global financial calamity. Our guess is that they aren’t going to like it.

For 2023, we see US stocks, as represented by the S&P 500 stock index, trading in a range of 3300 to 4300. (It ended 2022 at 3840.) We think a realization by investors that the Fed may settle for an inflation rate above 2% will keep the benchmark ten-year Treasury note yielding comfortably above 3% (currently 3.88%), while slower overall global economic growth will likely lead to stable to declining commodity prices.

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 2023.

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

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.

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.