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June 2023 | Quarterly Letter

John H. Crawford, III
Jul 26, 2023

As we make the turn at midyear, this is a good time to assess the status of the economy and financial markets and make some judgments about their prospects.

"Be prepared to give it time. Be prepared to skim when  you come to a particularly annoying digression. But most of all be prepared to stay with it for the long haul. It is worth it." 

-Daphne Merkin, Novelist

The above quote comes from a book review of Seven Types of Ambiguity, and while its context has nothing to do with investing, there is good advice in it for us as investors. We use the quote to introduce the theme of uncertainty that is characteristic of the economy and markets today, and we particularly like the admonition that when annoying digressions arise, skim, but keep going for the long haul. It is worth it.

THE ECONOMY. Looking back to the beginning of this cycle, the U.S. economy was performing well at the beginning of 2020, only to be totally disrupted by Covid. The more time that passes, the more we can appreciate just how destructive Covid has been. Upon arrival of Covid the economy immediately went into recession, followed by rescue from fiscal policy that in retrospect was far too aggressive, a bout of very high inflation that still persists, and then restrictive monetary policy that has forced interest rates higher. All of these phases have been a part of what has turned out to be a challenging and elusive transition back to economic normalcy. We are still not there.

At this point in the cycle monetary policy is working its way through the economy, although to what extent and how successfully is not known. Inflation has peaked but remains far above the Federal Reserve’s (Fed) target of 2%. The biggest uncertainty is whether the economy will fall into a recession in the relatively near future. If it does it will be one of the most widely anticipated recessions in history. However, the economy continues to defy these predictions as it is performing well as measured primarily by employment and Gross Domestic Product (GDP). Unemployment resides at only 3.7%, and job openings still far outweigh job applicants. It is difficult for an economy to fall into recession absent a drop in overall demand, not a likely outcome as long as employment stays high. Finally, expectations are that GDP growth was around 2% in the second quarter. 

A recession is widely expected for a number of reasons, most prominent of which are an inverted yield curve and a strongly negative reading by The Conference Board’s Leading Economic Index. In the past, when these two indicators were simultaneously sending negative signals, recessions almost always followed. On the other hand, we note that the possibility of a soft landing seems to be improving. The key will be whether inflation can decline far enough and fast enough before unemployment begins to rise substantially, thus allowing the Fed to reduce interest rates to less restrictive levels. A soft landing would be a pleasant surprise and would be well received by investors. We conclude this discussion of the economy with the suggestion that even if the economy does fall into recession, the fact that it has remained strong to date suggests that a recession would likely be a relatively mild one. 

STOCKS. On the surface it would appear that the stock market is not worried about a recession. We say “on the surface” because the stock market today is really a tale of two markets. For instance, for the first half of the year the S&P 500 returned 16.89% on a total investment return basis. In contrast, the Dow Jones Industrials are up only 4.94% and the Russell 1000 Value index is up 5.12%. Why such a disparity? Mainly because the S&P 500 is dominated by five very large stocks which have done inordinately well this year and now comprise almost 25% of the index. Furthermore, this year Artificial Intelligence (AI) has burst on the scene, and any stock that has an identifiable exposure to the potential of AI has done very well. Again, this is a small group of stocks. All of this means that the stock market is highly concentrated and its strength resides in a small number of stocks. Normally, this is considered a sign of potential weakness, it being far preferable for the broad range of stocks to be moving upward together.  

The factor of concentration can cut both ways. It can be a precursor of weakness as the highly valued stocks migrate back toward more reasonable valuations, or it can be taken as a sign of leadership that has the capacity to spread out to the rest of the market, leading to a broader based advance. Which of these two possibilities turns out to be the case is uncertain, one more factor for investors to consider. More important perhaps are the earnings that the corporate sector can produce. Reflecting recession possibilities, earnings have been expected to decline, and while they are retreating somewhat, they have been holding up surprisingly well. In essence, companies seem to be adjusting well to the environment. 

There is a popular Wall Street maxim that a 20% move up from a stock market low means that it is in a new bull market. This maxim is now in play since the S&P 500 did advance over 20% from its low point last fall. Are we in a new bull market? We hope so, but we really do not know, nor does anyone. Jim Grant, prominent market pundit, recently quipped, “The market is always right in the end, but it sometimes plays dumb in the interim.” What we do know is that there are mixed signals from the market and we would prefer a broader, more inclusive advance. 

BONDS. This asset class is also presenting challenges for the investor. Once again, the outlook for bonds hinges on the outcome of the monetary policy/inflation conflict and whether it will result in a recession. As noted above, the bond market is severely inverted with short-term yields significantly higher than longer-term yields. Should the investor enjoy the higher yields now, or prepare for the time when the yield curve will right itself and offer higher yields on the longer end, as is customary? Either way, whether we have a recession or soft landing, we expect the yield curve to revert to its more normal status as the Fed finishes its tightening program and begins to ease rates. Of course the timing of this is uncertain, but the likely course is for the Fed’s tightening to work either in subduing inflation in pretty short order or inducing a recession, which will in turn provide the opportunity for a policy shift toward easing. When this occurs, investors will wish to be positioned further out on the maturity spectrum, something our bond policy is executing now.

ASSUMPTIONS. We could just as easily title this section FORECASTS, but since “forecasts” assumes a higher degree of precision, we prefer “assumptions,” considering the level of uncertainty contained in the outlook for the economy and the markets over the short-to-intermediate term. The big questions are: will inflation be contained, if so will containing it require a recession, and how long will it take for the economy and markets to transition back to normal?  Here are our assumptions. 

  • We assume the Fed will be successful, and by sometime next year inflation will be at or near the Fed’s target of 2%. 

  • We assume the move downward in inflation will be aided by a mild recession starting later this year or early in 2024. We hope we are wrong in this assumption and do not totally discount the possibility of a soft landing, which would be a much better outcome. 

  • Corporate earnings will suffer, and unemployment will rise. Recessions are always a challenge for stocks, but since a recession would be a precursor for interest rate reductions, it would be favorable for bond investors.

  • The complete transition back to a more normal economic and market environment may take another two years. We assume it will be achieved.
If the above sounds discouraging, we suggest that we return to our opening quote for advice. Yes, the transition back to economic normalcy is taking longer than expected, but “be prepared to give it time.” Patience is always our advice. A recession would definitely be “an annoying digression,” but like all recessions, it will end. So don’t let these annoying digressions get in the way of the longer view—stay with it for the long haul. It will be worth it.

Over the 43 years of our existence as a firm there have been many periods when there has been high uncertainty surrounding the outlook for the economy and markets. We have learned from our experience that the best way to get through trying times and to be able to endure these annoying digressions is, in fact, to keep the long view and faithfully adhere to our time-tested investment principles. Invest in quality with the belief that in the end it will serve us well by participating nicely in the upside of markets while preserving capital on the downside, as it has in previous cycles.


The opinions expressed are those of Crawford Investment Team. 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.

Crawford is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Crawford’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.

Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed.

Crawford reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.



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