March 2024 | Quarterly Letter

Longtime readers of our letters recognize in them a consistent theme of optimism. As we enter the spring, the season of hope and renewal, we acknowledge that there is considerable optimism in the investment community today, much of it well grounded. However, there is always the other side to the picture, known as risk. Thus, we look below to the words of a behaviorist for a comprehensive definition of optimism.

“Optimism is a confident expectation of good to come that acknowledges the challenges of reality without diminishing hope or causing loss of confidence.”

-Gary J. Lanham

We like this quote. It embraces confidence, acknowledges the challenges of reality, and references hope as a part of optimism. Taken together, these elements embody much of what is contained in our investment approach. As we invest for you, our clients, we undertake the task with optimism. This optimism is derived in large part from our ability over time to produce favorable outcomes. The way we invest is built for higher probabilities of success over the longer term. On the other hand, the challenge of reality is that neither the economy nor the financial markets are perfect. At times they both are given to extremes, overenthusiasm, trendy themes, and excesses, all of which can lead to periodic corrections in the broad sweep upward. When these interruptions are serious enough we call them recessions or bear markets. But even in the depths of recessions or bear markets we never lose hope, not naive but realistic hope that is grounded in timeless fundamentals of investing.

Indeed, the economy today is giving us much to be optimistic about. It is performing well. Gross Domestic Product (GDP) has been very strong, running well above trend for the last several quarters, and almost everyone who wants a job has one. The biggest economic issue is inflation, which remains higher than desired. Even so, it has been improving dramatically over the last year, and while the last two inflation readings have been disappointingly high, the overall trend is still downward. Finally, interest rates, which are so important in making the economic machine run smoothly, are higher than normal due to Federal Reserve (Fed) actions to bring inflation down further. At its most recent meeting the Fed reiterated its belief that inflation is still on trend toward the 2% target and, as a result, that it expects to begin reducing rates later this year. If we were grading the economy on these elements we would probably give it at least a B+. Not a bad grade, and a much better one than any of our global partners would get for their economies. Finally, to top off all of this good economic news, the stock market and our firm's portfolios have been regularly hitting new all-time highs.

While such a favorable reading of things can certainly put one in an optimistic mood, it would be well to keep in mind that section of the definition of optimism that “acknowledges the challenges of reality…” The reality is that a lot has to continue to go right if we are going to stay on the optimistic path. All investment is about return and risk. And since the markets are always looking forward, it is the ill-defined future that has the potential to provide negative surprises. Currently, the good news on the economic and market fronts makes us optimistic about the future, but we also need to keep in mind the risks to the outlook.

We highlight two major risks: one is economy related and one is market related. With regard to the economy, investors seem increasingly to be accepting of the idea of an economic soft landing. The Fed is actually reinforcing this scenario with their economic projections that suggest a smooth glide down to 2% inflation, moderate increases in unemployment, and lower interest rates. The risks here are obvious. The Fed can misread the tea leaves and either begin reducing rates too soon thus reigniting inflation, or stay tight for too long, thus bringing on a recession. Either way, the outcome is not good. Last year recession fears were elevated, but currently, talk of the risk of recession has all but disappeared even though there are still indicators that warn of one. We have not been predicting a recession but have been in the “recession watch” camp. The challenges of reality suggest that we remain there until there is more evidence that the Fed’s policy moves will be successful.

The market risk that we highlight, oddly enough, has to do with optimism. Optimism can be taken to an extreme, resulting in overoptimism that does not acknowledge the challenges of reality. Here we point to what we consider excessive enthusiasm in more speculative stocks and some areas of the technology sector, specifically those companies that are engaged in artificial intelligence. Meanwhile, the broader range of stocks is not performing nearly as well and may not be projecting an optimistic view of strong economic growth that would benefit all companies. In the past, such market dichotomies have not been a sign of market health, especially when stock valuations are elevated, as they are today. High valuations do not imply that stocks have to decline, but it typically means that if economic weakness develops then share prices are more vulnerable. This is one of the reasons we prefer to invest in more consistent companies with reasonable valuations.

The last aspect of optimism that we will address is hope. We certainly hope that the Fed is successful in its pursuit of 2% inflation without a recession, and we hope that the markets broaden out to a much fuller participation that anticipates a very favorable economic environment. But regardless of how these things turn out, we have to keep investing, and we will with a sense of optimism that in the end our approach to investing will yield satisfying results. Of course it helps to have a favorable economic setting within which to invest. We note that over long periods of time our economy has proven its resilience, and we expect that to continue. 

Earlier we made the claim that the way we invest is built for higher probabilities of success over time. This does not mean that every investment will be a good one, nor does it mean that our approach will distinguish itself every year. What it does mean is that we are constructing portfolios that have strong fundamental characteristics that are likely to be judged favorably by investors over time. Our approach also attempts to satisfy multiple investment goals: preservation of capital, income and growth of income, and appreciation. Recognizing the wide range of future outcomes that exists for an investment, we attempt to narrow that range of potential outcomes, thus increasing the chance of success. And we narrow the range by investing in quality as the most prominent characteristic of the portfolio.

Quality is not always on the mind of the investing public, but in the end it has a way of rising to the surface. Furthermore, our attempt to identify quality begins with the dividend and what it tells us about a company and the consistent performance of its business. As noted earlier, we place a high value on consistency, and companies that have a record of consistently maintaining or raising their dividends are able to do that for a reason. It is because their business operates with such consistency that they have the confidence to share their profits with shareholders.

Bill Bradley, NBA Hall of Fame basketball player, Rhodes Scholar, and distinguished senator, who has led a constructive and successful life, once said, “I am in the optimism business.” We say the same. Our optimism acknowledges the challenges of reality but views the future positively because of the quality that undergirds the portfolios.

Disclosures:

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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