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March 2021 | Quarterly Letter

John H. Crawford, III
Apr 12, 2021

The first quarter was one of the more active ones in recent memory. We inaugurated a new president, the Congress passed a massive relief/aid bill, the Covid-19 virus began to fade, and the economy continued its recovery with high expectations that economic growth will be booming later this year. The stock and bond markets received all of this in different ways. The stock market reacted favorably to prospects for better growth and higher corporate earnings. Bond investors became fearful of too much growth and resulting inflation and took longer-maturity bond yields sharply higher from a very low base.

"When the facts change, I change my mind. What do you do, sir?"

This famous quote is variously attributed to John Maynard Keynes, the founder of Keynesian economics; Winston Churchill; and Paul Samuelson, Nobel Prize winning economist – all luminaries of note. Regardless of who said it, it is pithy and wise. Who can argue with keeping one’s mind in line with reality? We present this epigram for consideration since today there seems to be a wider than normal range of opinions regarding the fundamental course of the economy and financial markets. If the facts are changing, we should be obliged to change our opinion.  

Here are some facts. At their latest readings, the conditions of the economy and financial markets indicated that Gross Domestic Product declined by 3% last year; the yield on the benchmark U.S. Treasury ten-year note is 1.7%; inflation has been running at about 1.5% annually; and the price-to-earnings ratio of the S&P 500 is 22 times the estimate of the next twelve months’ earnings. What these facts do not tell us is what the readings will be in one or two years. This is unfortunate, for the financial markets tend to trade on expectations of what the future holds for the economy, what business conditions will be, and how financial participants will react. This is the tricky part, for it requires a forecast, which is by nature uncertain. We provide our forecast, but we include potential risks as well, both to the upside and downside. As the future unfolds and facts emerge, we may be forced to change our opinion, but for now it is too early to tell.

BASE CASE We believe the U.S. economy began a new cycle of recovery/expansion last April after the economy hit bottom and, with aggressive moves by monetary and fiscal authorities, began to recover. That recovery has proceeded since then, not in a straight line, but consistently upward. Now, with the passage by Congress of the American Rescue Plan totaling $1.9 trillion of aid and stimulus and the likely reopening of the economy by this summer, prospects are that the recovery will gain considerable steam over the course of this year. Growth in Gross Domestic Product (GDP) of at least 6% is expected this year, a level not seen in decades. This extraordinary growth should be transitory, continuing into next year at a slower pace and by 2023 approximating its sustainable growth rate of around 2%. Importantly, inflation is almost assured of being higher this year since comparisons will be to the abnormally low numbers of a year ago. The base case assumes this inflation uptick will also be transitory, and with the economy trending back toward sustainable growth, inflation will remain subdued on a longer-term basis. This will allow the recovery/expansion to morph into an expansion phase that should have the potential to last for a number of years, similar to the last cycle that lasted eleven years. We believe this base case scenario has a reasonable chance of coming to fruition.

DOWNSIDE TO THE BASE CASE The risk to our base case scenario is a period of overheating, that is, too much growth, which is strong enough to sufficiently alter the supply/demand equation such that inflation is the result. Such developments would represent a policy error: excess fiscal stimulus that leads to a serious inflation problem that is not transitory, but lasting. Such a situation would no doubt cause the Federal Reserve (Fed) to raise interest rates. The goal of achieving a soft landing is elusive, and in pursuit of such there is often too much monetary restriction, causing a recession. Recessions are always harmful and disruptive, and bear markets in stocks inevitably follow. This is not good. So let’s beware of too much growth later this year and next, and see if and what type of inflation follows.

UPSIDE TO THE BASE CASE If our base case scenario develops anywhere near our description, it will be a favorable outcome. There is, however, a scenario that is even more favorable on a longer-term basis. At its essence it postulates that the shift in fiscal policy to a more dominant role in the management of the economy leads to a higher growth rate, not briefly, but more permanently. Instead of growing at around 2% going forward, if the economy could expand by 2.5 or 3.0% per year with inflation and interest rates still in reasonably low ranges, this would be a major economic achievement.

How might it happen? The answer centers on aggregate demand. A higher level of overall demand in our economy could potentially spur more capital spending, which in turn could boost productivity, one of the two activities that create economic growth. We note growing acceptance of budget deficits and the aggressive use of fiscal policy owing to the effect of low interest rates and the reduced cost of servicing government debt. This provides a lot of flexibility to policy, and the right kind of job-creating spending could potentially increase aggregate demand and lead to a higher level of growth in the economy. We do not place high odds on this scenario but introduce it as a possibility to be considered. We will keep an eye on this in the hopes that we will see facts that will give us occasion to change our mind.

INVESTMENT IMPLICATIONS Looking forward, we believe our base case is the most likely outcome, but we are also keeping our eye on the downside and upside scenarios. Obviously, the various scenarios we have outlined carry different investment implications. In our opinion, the most favorable from an investment standpoint would be the base case and upside scenarios. Both would provide a constructive environment for businesses and would resemble the last recovery/expansion cycle when the financial markets performed very well. Of course, the upside scenario would be the very best case since overall growth would be faster, leading to faster earnings growth. Stocks should do well, and assuming inflation remained under control, bonds could perform in a satisfactory manner. The scenario we worry about is the downside case and the unpleasant conditions it would bring about for stocks. They always decline in recessions; however, bonds could represent a hedge in such circumstances as they do well in recessions. While we place lower odds on its occurrence, we must be prepared for the possibility of the negative consequences associated with the downside case. How do we do it? The answer is the usual one: stick with quality. 

Whether it is in bonds or stocks, the central element in our approach to investment is quality. We remain loyal to quality because we believe it reduces the range of potential outcomes and provides a higher level of confidence that the result of an investment will be favorable. The characteristics of quality that appear in your portfolio are several: businesses that have proven their stability and sustainability over long periods of time, financial strength, high internal returns from the business, and shareholder friendly capital allocation policies. 

We can certainly change our mind on the likely outcome of various scenarios of economic cycles. But do not expect us to change our mind on quality as the foundational principle on which we seek to build portfolios. We believe this is the best way to achieve your investment goals.


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.

The opinions expressed are those of Crawford Investment Counsel. The opinions referenced are as of the date of the commentary and are subject to change, without notice, due to changes in the market or economic conditions and may not necessarily come to pass. Past performance does not guarantee future results. Crawford Investment Counsel 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 advisory services can be found in its Form ADV Part 2 which is available, without charge, upon request. Additional information can be found at www.crawfordinvestment.com. CRA-21-077

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