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December 2020 | Quarterly Letter

John H. Crawford, III
Jan 01, 2021

Considering the circumstances of the year, most investors would agree that 2020 turned out better than expected from a return standpoint. From a 35% decline in stocks in March to a 65% rally to all-time highs in the next nine months, it was quite a ride. Returns from stocks were not distributed in an even manner, as some of the popular averages overstated strength in the broad range of stocks and failed to reflect the contrasting fortunes of value and growth stocks. Nevertheless, most equity portfolios found their way to positive returns. Bonds were also positive contributors, as yields declined sharply in response to the collapse in the economy and remained low as a result of Federal Reserve (Fed) policy and low inflation. It was a year in which both stocks and bonds made a contribution to total returns.

By almost any measure, 2020 was not a normal year. It was filled with abnormalities on the personal and social fronts as well as on the economic and investment fronts. There is nothing normal about being restricted to one’s home for nine months or being unable to interact with family and friends on a personal or regular basis. There is certainly nothing normal about an annual contraction in economic growth of some 3%. After nine months of this pandemic, fatigue has set in among most, and above all, the desire is for a return to normal. We will leave it to the sociologists and future seers to tell us what the lasting influences of the pandemic will be in terms of personal and business practices. Our discussion will focus on what it might mean to get back to normal in terms of economics and investing.


From an economic standpoint it is important to remember that while the U.S. economy was not performing perfectly prior to the pandemic, it was in pretty good shape. Most people had a job, wages were making grudging progress, and inflation and interest rates were low. To be sure, there were points of vulnerability in the economy, but the overall setting was conducive to businesses, and corporate profits were running at all-time highs. Then the pandemic hit. It came as a total surprise, followed swiftly by a virtual lockdown of the economy which led to a dramatic contraction in overall economic activity. With a tremendous boost from both monetary and fiscal policy, the inherent resilience of the economy was soon evident as a strong recovery ensued. We still have a long way to go, but at least we are underway. Importantly, while it is too  early to be certain, signs are that there was little structural damage done to the economy. This augurs well for the future and a return to normal. Of course, the next step in this saga was the arrival of vaccines, and with their successful distribution and acceptance we believe there is the hope that normal activity lies ahead for us in the near future.

We are also remembering that when the pandemic hit, bringing on the recession, the economy was in a record long 11th year of recovery/expansion. Even though the recession has not been declared as over, we believe the economy hit bottom in March/April and that it has begun a new cycle of recovery/expansion, one that has the potential to be another long one. Exogenous events can always arrive unexpectedly as did the pandemic, but outside of such occurrences, if inflation remains subdued there is a chance we could be in the early stages of an extended cycle.


Any definition of normal implies something about conditions being stable and ongoing. The Fed, charged with responsibility for managing the economy to a stable and sustainable place, makes projections about the course ahead for the more important measures of the economy. We use these projections as a framework for discussion. They are no more likely to be exactly on target than any other projections, but we assume they are at least directionally correct. Currently, the projections for 2021 call for a strong year of GDP growth, further improvement in employment, and a small uptick in inflation. But they only foresee a return to normality in 2023 – normal in the sense that the economy will be at levels that are sustainable for the longer term. GDP growth should be around 2%, unemployment near 4%, and inflation at the target of 2%. If in 2023 we reach these projected levels, the economy will be performing approximately where it was before the pandemic, and this will be a constructive outcome. In terms of its general outline, we endorse this view of the future. We repeat that it was a favorable setting for businesses, which is what we desire as investors.


Putting aside the longer term, what might we expect in 2021? The best estimate is that the two halves of the year will be very different. Most of the difference will be due to the vaccines and the promise they hold for the second half of the year. Right now the economy is sputtering at a time of COVID’s most virulent phase and should continue to do so for the next few months until we get the virus under better control. In contrast to the cyclical strength of the last nine months, most economic series are now deteriorating. This is evident in rising first-time claims for unemployment benefits, reduced consumer spending, lower levels of confidence, and others. In short, the pandemic and its influence on the economy is far from over. Fortunately, the vaccines offer the hope of freedom of movement in the second half of the year, and with movement comes economic activity. We as consumers have been restricted, unable to spend at normal levels. The result has been a large increase in savings. In addition, many mortgages have been refinanced at favorable levels, thereby increasing financial flexibility. Inventories have been depressed and will have to be replaced, leading to more manufacturing activity. All of these factors are resources that can be released once personal freedom returns, and the result should be a very robust economic environment in the second half of the year.


If 2020 illustrated anything, it was that the unpredictable can happen at any time. We just don’t know what surprises the future holds for us or how damaging they may be. Since investment is a serious business, it behooves us to be invested in such a way that almost anything can be survived, at least on a longer-term basis. While we have views on the likelihood of certain outcomes, the direction of stocks and bonds over the short term is almost impossible to predict. As unexpected events occur, market volatility almost always accompanies them. This is a fact of investing that has to be accepted. But we believe that given a decent operating environment, there are certain companies whose stocks and bonds can survive almost anything. Here we are referring to quality, that characteristic that we value more highly than any other. For, in fact, we believe that quality is the characteristic that can narrow the range of outcomes for individual securities and provide a greater chance of eventual success. We will continue to invest for the longer term and seek out the highest quality securities we can find.

There is a wide gap between the mood of our country at large and the mood on Wall Street. In the regular world, there is widespread suffering and pain; on Wall Street, unbridled optimism. While there is, in many respects, justification for investor optimism, it may be excessive. We caution that bull markets rarely move up in a straight line, and they are always subject to correction, especially when optimism seems to diverge from reality. We retain our constructive view of the longer term but would not be surprised to see some shorter-term interruption in the bull market for stocks.

We will never know for sure what future events will be dealt us. What we can say for sure is that we will be making our very best effort to take advantage of whatever economic environment is provided and to construct portfolios of high-quality securities, looking for ways to enhance income and provide a risk profile that can preserve capital.

We begin the New Year with hope. We expect to return to normal, an expectation that is grounded in belief in the basic strength of our economy and its ability to recover and expand. We know there are great companies that are available for investment, both in stocks and bonds. We will be seeking them out at levels that provide value. We also begin the year with gratitude for the opportunity to work with you in the management of your assets. It is our pleasure, and we thank you.

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