Year End Letter

January 2022

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Dear Clients and Friends,

In our last annual letter to you, we noted how 2020 had been an extraordinary and difficult year, but there were reasons to be optimistic about the year ahead. A year later, things seem… rather the same. The ongoing evolution of the COVID Pandemic continued to be the over-arching story in 2021, affecting society, the economy, and the stock markets. Just when we seemed to be turning the corner in fighting the Pandemic a new more transmissible (but hopefully, less severe) variant has upended the plans of people and businesses. We hope the experts who say it may run its course quickly are correct.

Like many companies, Stewart & Patten continues to operate largely on a remote basis, with staff rotating into our office on a staggered schedule. Fortunately, our business and our team have adapted well, and in many ways, technology has made our operations even more efficient. We look forward to convening together in person in the near future. We have strived to continue providing the same high level of service to our clients, and we thank everyone for their understanding and cooperation.

As they did in 2020, the markets in 2021 demonstrated the amazing ability to anticipate better times. The S&P 500 returned a stunning 27% for the year, and the Dow Jones Industrial average rose 18%. Despite the disruption of the pandemic, the markets noted the real year-over-year recovery in economic activity, corporate earnings, and employment. Stock prices were supported by continued Federal stimulus and low interest rates. The markets continue to "look forward" and see ongoing recovery and an easing of societal and economic disruption – reasons for both optimism and healthy skepticism.

While stock markets soared, cash and bond yields remained historically low, also largely a result of monetary and fiscal policies. In this environment, stocks benefit from a TINA mentality – as in "there is no alternative". This is of course of interest to us, since most of our client portfolios are 60% stocks and 40% bonds. From time to time, this asset allocation, which is common in conservative investing portfolios, has been declared to be… well, dead. As has been the case since Jack Stewart and Ron Patten began serving their clients, we continue to respectfully disagree. If the stock portion of our portfolios keep up with the market, as it did this year, our clients will participate, while the bond portion of their portfolios will hold their value and partially protect them in a down market. We saw this in various market downdrafts this year, and we saw it in extreme clarity in March 2020, in 2008, and in the early 2000's. Our bond portfolios feature high quality issues and short maturities, presenting an opportunity to reinvest in higher yielding bonds should inflationary pressures continue.

Inflation and higher interest rates are of concern as they tend to have an adverse effect on stocks. In particular, highly-valued growth and technology stocks can be pummeled, as we have seen towards the end of last year and in the first days of 2022. Amazingly, 40% of the stocks in the tech-oriented NASDAQ index are off 50% from their all-time highs. The good news is that the stocks that we buy – large, established, profitable, cash rich and mostly dividend-paying – tend to fare better in such an environment. When we do invest in technology, it is in companies that also meet these criteria – companies such as Apple, Microsoft, and Broadcom.

Increasing awareness of ESG in the investment world (environmental, social, and governmental issues) has caused us to pay more attention to and track various metrics that score companies on this. Some of our clients have asked for our reaction to this. It's complicated; sometimes the scores from the various research resources on the individual companies are, head scratching. But we do recognize that this is increasingly important and will be recognized in stock valuations as investment dollars flow towards positive ESG companies.

When we look for new investments and evaluate existing ones, we may use ESG as just one consideration. Many of our companies are diversified across many industries, and several have important exposure to alternative energy, electric vehicles, and renewable materials. Again, it's just one factor we look at, but sound ESG business practices are ultimately good for business, and stock prices. We have also continued a long trend of paring back our exposure to fossil fuel stocks. Of course, they did very well this year, but we invest with the future in mind.

We wish you and your families health, happiness, and prosperity in 2022.
Stewart & Patten Co. LLC


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