Year End Letter

December 30, 2020

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Dear Clients and Friends,

We usually reach out to you during the Holiday Season to look back and recap the year that was. This year, it’s not an easy task. We have all heard the descriptions of 2020: “unprecedented”, “extreme”, “tragic” and “heartbreaking”. So, as we review the year that was, it may be just as important to focus on the future with some hope.

In mid-March, the City of San Francisco imposed a strict shutdown, and our company went into work at home mode for what we thought might be two or three weeks. We were well prepared for this; our industry is highly regulated, and we are required to have detailed disaster recovery plans in place. Little did we know the few weeks would stretch into months, and now, into a new year. We are fortunate that our business is well suited to remote operation. Our daily morning staff meeting, once done in person, is now a Zoom call (sometimes happily interrupted by a wayward pet or child). While our business functions well, we look forward to a time when we again can sit around the conference table for meetings and lunch. We are thankful that our team is filled with experienced professionals who have risen to the challenge. We are also grateful that, so far, our families are safe and healthy.

As the pandemic crisis unfolded and we evaluated the damage to the economy, it became clear that some companies, and industries, would never be the same – at least not for a long time. Travel, retail, movie theatres, and restaurants all face challenges for the foreseeable future. Some companies are thriving in the pandemic: those in technology, consumer staples, delivery and e-commerce, for example. We have continued to focus on the type of companies that we have invested in for many years: large, established US companies with plenty of cash, large market share, and diversified businesses. We think that these companies will not only survive the pandemic, they will thrive in some cases, and continue to prosper when things return to normal – or as the phrase goes, “the new normal.”

For most of our clients, we have always used a balanced portfolio—approximately 60% stocks, 40% bonds – as our model portfolio. We feel this positions our clients to participate in an up market and have some protection in a downturn. As many of you who have been longtime clients know, this has served us well in tough times – the Dot Com bubble, the 2009 recession, and various market dips. This year was no different. When the stock markets plummeted in March as the severity of the pandemic became apparent, our holdings in high quality bonds held their value. We also took this opportunity to add to our holdings in high quality stocks at discounted prices. Federal stimulus actions supported the bond market, and interest rates plummeted. The results have been a mixed bag. Low interest rates help companies borrow to get through tough times (and individuals to refinance mortgages to reduce expenses) but limit the yields available on new bonds.

As the pandemic raged and the market fell, and with the economy largely shutdown, the country also went through major social upheaval. Tragic events, protests and violence, and deep political divisions were all overlaid by the surging, and then resurging health crisis. It remains to be seen if the social and political climate improves and real changes are made, but there are some positive signs. In the long term, the economy and the financial markets are helped by a stable, equitable United States.

Despite the upheaval of 2020, the stock market quickly recovered and rose to new heights never before attained. Stock market performance is primarily based on where investors believe the market and corporate earnings are headed. Previously, many investors looked to the next quarter; however, now, most are looking to the next year. While many Americans are still struggling with job losses, illness, or the effects of shutdowns and quarantines, strong economic indicators provide glimmers of hope. Hopefully, 2021 brings better news on all fronts.

We wish everyone health, safety, and prosperity in the New Year
Stewart & Patten Co. LLC


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