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June 2021 | Quarterly Letter

John H. Crawford, III
Jul 16, 2021

During the second quarter both stock and bond investors had much to assess. Prominent among the issues were the progress of the economic recovery, potential changes to Federal Reserve (Fed) policy, and higher than expected inflation numbers. As events unfolded, stock investors enjoyed further gains, while on the bond side many were surprised that longer-term yields declined, thereby providing positive bond returns for the quarter. On a year-to-date basis, bond total returns are still slightly on the negative side.

“Phases and stages, circles and cycles, scenes that we’ve all seen before. Let me tell you some more.”

- Willie Nelson, Phases and Stages

There are many sources of wisdom in this world. For it, we turn to poets, priests, statesmen, philosophers, economists, and yes, Willie Nelson. In its plain simplicity country music can often reduce things to their essence. Willie sings, “After carefully considering the whole situation” which, of course, is what we attempt to do here at our firm. He then goes on to note the recurrence of patterns in life, which is also true in economics and investing. In these letters we attempt to “tell you some more,” so let’s look at some of the economic and investment patterns that we have been experiencing and some that we expect to unfold over the intermediate and longer term.

RECOVERY PHASE. After its dramatic collapse in March 2020, the U.S. economy began a strong recovery phase almost immediately. Massive monetary and fiscal policy initiatives were of great assistance. After contracting by 5% on an annual basis in the first quarter, the U.S. economy experienced an astounding decline of 31% in the second quarter. Much of this damage was erased in the third quarter when Gross Domestic Product (GDP) recovered by 33%. Still, this left the economy considerably below its potential, a condition that still exists to a lesser degree. Further relief in the form of broadly distributed federal stimulus checks and enhanced unemployment benefits began to really kick in. This year, a fully opened economy is expected to expand by some 7%, a level of growth not seen in many decades.

Even though the recession of 2020 has not been officially declared over, it will go down as one of the briefest contractions on record. The ability to recover so rapidly can be attributed to the scientific community and its development of effective vaccines, aggressive fiscal and monetary measures, and the inherent resilience of the economy itself. We take solace from the fact that the government and its agencies were able to react so quickly and forcefully in dispensing aid and support. No doubt we have learned lessons that will stand us in good stead when the next crisis hits. It also helped that the economy was reasonably well balanced pre-pandemic; thus, we were able to escape with limited structural damage.

TRANSITION PHASE. We now find ourselves in a period of transition that is complicated by a number of factors. In the larger sense we are transitioning from recovery to a more normal economic state, and this phase is likely to last a couple of years at least. Even though we are enjoying a dramatic recovery, we also may be peaking right now in terms of GDP growth. From the second quarter of this year on there is expected to be a downward-trending rate of growth in GDP until we reach the sustainable growth rate of the U.S. economy at around 2%. This should occur in 2023 or 2024.

One of the complicating factors in the transition phase is the emergence of inflation, which is currently running at high levels. The Consumer Price Index (CPI) is clocking at 5% on an annual basis, and the Core Personal Consumption Expenditures Index (PCE), the Fed’s favorite inflation measure, is well above 3%. Remember, the Fed’s goal for this index is 2%. The Fed’s position is that this inflation is transitory, reflecting comparisons to depressed inflation figures last year and supply side disruptions caused by the pandemic shutdown.

We tend to agree with the Fed on the outlook for inflation. It seems only reasonable that considering the breadth of our economy and how integrated the supply chain is, a total shutdown followed by rapid recovery would bring frictions, dislocations, and disruptions along the path to normalcy. Both demand and supply collapsed last year, and while demand rebounded sharply, supply chains could not recover as quickly, leading to shortages and delays. This gave producers pricing power they would not normally have had. In short, the supply/demand relationship was turned upside down. This comes after decades of an economy suffering from a shortage of demand, which led to stable-to-declining prices. We believe that when the transition phase is completed, overall supply will again exceed demand. This is the basis of our conclusion that current inflation is transitory.

We expect the frictions and dislocations of a recovering economy to be resolved over time. It would have been unreasonable to expect a total shutdown of the economy to automatically, and smoothly, return to its previous state.

NORMAL PHASE.  This phase still lies ahead of us, but we believe it is on its way. A few years back the term “new normal” was in vogue. It described a condition in which an economy, society, etc. settles following a crisis, when it differs from the situation that prevailed prior to the crisis. In economics the term was employed to describe conditions following the Great Recession of 2008-09. The new normal was low GDP growth, low inflation and interest rates. In the current phase, we expect to see the economy return to its basic, new normal condition before the pandemic hit. After all, the cause of the recession was an exogenous event, one that had little to do with the functioning parts of the economy. If little or no structural damage was done to the economy, it should return at some point to its “normal” state. The dislocations that we refer to above will just take some time to work their way out of the system so that general equilibrium can be achieved.

As stated before, we expect the normal phase will arrive in 2023 or 2024. This should put us back in what we have labeled the “2% world,” with GDP growth, inflation, and interest rates all coalescing around 2%. If this transition is successful there is a good chance that we could enjoy an extended recovery/expansion cycle similar to the last one. While the economy was not perfect, we believe it provided a good world for investors, and we expect it to be a good world again.

INVESTMENT PHASE. The investment world, like the economic one, has its own set of phases and stages, scenes that we’ve all seen before. In equities, investment styles come and go as value rotates to growth and back again, and certain sectors of the economy excel for a while. The stock market is subject to corrections and even bear markets, but fortunately, we believe the longer-term trend is upward. Equity owners pay a price for higher returns in the form of more volatility, but we believe the reward is worth the risk. Bond investors are exposed to cycles also; however, once a major interest rate trend sets in, it seems to remain in place much longer. The trend toward lower bond yields has been going on for over 40 years, and while its low point may have been reached in the summer of 2020, the era of low interest rates is not over yet, in our opinion.

In our view and in our way of investing, there is one aspect of investing that is exempt from the influence of cycles. For both bond and stock investing, the paramount consideration for us is quality. While there are periods when investor appetites for return overwhelm good judgment and speculation rules the day, our experience tells us that quality is the best way to invest as a permanent strategy. For most investors, their goals include some mixture of preservation of capital, income, and appreciation. Quality serves them all. It is a characteristic of successful companies, and importantly, a risk moderator. We believe it offers the best opportunity to transcend cycles and successfully navigate transitions. Expect us to stay with quality as our most important investment characteristic.


Crawford Investment Counsel Inc. (“Crawford”) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Crawford including our investment strategies and objectives can be found in our ADV Part 2, which is available upon request.

This material is distributed for informational purposes only. The opinions expressed are those of Crawford. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed. Forward-looking statements cannot be guaranteed. This document may contain certain information that constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology. No assurance, representation, or warranty is made by any person that any of Crawford’s assumptions, expectations, objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future.



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