March 2026 | Quarterly Letter

Interconnectedness as a concept can be of relevance to investors when trying to understand current investment conditions. In simplified terms, interconnectedness refers to the fundamental relationships between all living and non-living things, where all parts of the world exist in a delicate interdependent balance. In recent years, interconnectedness as it relates to the economy and investment markets has been in a favorable balance for investors. Now, the Iranian war and subsequent energy shock bring the potential for imbalance with negative implications for the investment scene. So much will depend on the duration of the war and the terms on which it ends. We think about this interconnectedness in three ways: how it has supported markets, how it is now being tested, and what it means for the investment landscape. 

IN BALANCE: The past three years have experienced the dual tailwinds of abundant liquidity and Artificial Intelligence (AI) enthusiasm. This led to a rapidly rising stock market, which created a meaningful wealth effect. The phenomenon was such that the psychological benefit of higher portfolio values created a wealth-fueled consumption pattern that helped drive the economy forward and, in turn, helped create even more prosperity and jobs. This was all very bullish for stocks as interconnectedness was in a favorable balance, though strength was becoming increasingly concentrated among higher-income consumers and capital-intensive sectors. 

UNDER PRESSURE: However, the conflict involving Iran has added a new layer of uncertainty to what was already a global landscape that contained some imbalances. For some time, there was volatility under the surface of the stock market, particularly over the past six months, as rolling corrections went across economic sectors on fears of disruption by AI. Now, many of the companies driving that disruption are experiencing share price weakness themselves. Market indices appeared to be somewhat desensitized to geopolitical headlines until recently. Most of the popular stock averages have joined the decline and were in or close to correction territory, meaning they were down at least 10% from their recent highs. 

And it is not just the stock markets that have experienced volatility of late. Bonds also declined in March as fixed-income investors attempted to determine the implications for economic growth, inflation, and monetary policy. Over the past few years, interest rates have remained range-bound between a 4-5% yield on the 10-year U.S. Treasury note. Recently, fears of energy-induced higher inflation have exerted upward pressure on rates. This comes at a time when demand for credit is modest, and the interest rate-sensitive sectors of the economy are already not performing terribly well. Additionally, commodity prices, precious metals in particular, have been especially volatile.

The primary risk is not simply the Iran conflict itself or higher oil prices, but the possibility of financial contagion and spillover effects that could threaten the outlook for global growth. At a minimum, there will be disruptions in global supply chains, higher commodity prices, and damaged consumer and investor sentiment. Historically, geopolitical shocks tend to have short lived market effects because they have a limited impact on corporate profits. However, in some cases, these events can materially affect economic fundamentals. The concern is that an escalation of the war could do exactly that, and the interconnectedness that worked so well for many years on the upside might now work against us and become a domino effect. Whether the impact will be contained or more widespread remains to be determined. We do not know exactly how the conflict will play out.

INVESTMENT IMPLICATIONS: The situation is difficult, if not virtually impossible, to predict. On the positive side, it should be kept in mind that there are a number of highly constructive domestic conditions still in place. These include full employment, high levels of capital spending, inflation that is well-contained, and an earnings picture poised to produce another year of double-digit growth. The banking system is healthy, and corporate balance sheets are strong. Consumers are resilient. Stocks have corrected, bringing valuations back to more reasonable levels. While valuations remain above long-term averages in some areas, they are less demanding than they were at recent highs. It should be noted that there is also some stimulus in the system to help via the tax bill and prior interest rate reductions.  

Whether these positives are enough to offset the potential negatives of higher energy prices, fewer interest rate reductions, demand destruction, and weaker economies overseas, and ultimately stave off a recession and the potential chain reaction that could follow, remains to be seen. As is typical over a full market cycle, when we do get an economic downturn, the corporate earnings outlook will deteriorate rapidly, and expectations will be recalibrated. This could pressure stock prices and reverse the wealth effect, where falling asset values impair consumption, further weighing on economic activity. In the current state, policy responses may well be more measured as the Federal Reserve, leery of oil’s impact on inflation, likely will not have as much leeway to cut rates as in past cycles. Also, fiscal stimulus may be hampered by budgetary considerations and already elevated deficits. Markets have corrected, and some losses have been realized, but conditions could become more challenging from here.

OUR APPROACH: The environment is changing, and the period of outsized investment returns could be giving way to a more moderate return environment. This would not be a surprise, as we know that there is considerable cyclicality to the overall level of market returns. It has been very good for a long time, with strong returns over an extended period and valuations exceeding long-term averages. Regardless of how all this manifests, we believe this is a particularly opportune time to own high-quality securities trading at reasonable valuations. We have been using the market volatility to our advantage, seeking to upgrade quality and restore an attractive valuation profile to the portfolio. 

Our investment philosophy accepts that the future cannot be predicted with precision, and therefore, there is a sufficient amount of uncertainty associated with any investment decision. We strive to mitigate this risk by owning companies with strong financial profiles, high returns, and consistent earnings. Dividend consistency is a good litmus test for these characteristics that exemplify high quality. That is where we expect to remain invested, and we believe the portfolio is positioned attractively.  

Of course, nothing we have pointed out above is unknown to other investors. These offsetting positives and negatives should be reflected in market valuations. However, it has been some time since fear really came back into the equation. The positive influences reinforced one another for several years, and now the same interconnected framework could lead to the transmission of economic shocks. Some may have forgotten that these reinforcing forces can amplify strength in favorable periods, but can also work in reverse, particularly as speculative investments tend to perform poorly in a downturn. When that does finally occur, we expect that a more discerning portfolio of high-quality securities will be rewarded.  

“You can’t predict, but you can prepare.” – Howard Marks

Disclosures:

Crawford Investment Counsel (“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, fees, and objectives, can be found in our Form ADV Part 2and/or Form CRS, which is available upon request.

This material is distributed for informational purposes only. The statements contained herein reflect opinions, estimates and projections of Crawford as of the date hereof, and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forecasts, estimates, and certain information contained in this commentary are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Any projections herein are provided by Crawford as an indicator of the direction Crawford’s professional staff believes the markets will move, but Crawford makes no representation such projections will come to pass. Crawford makes every effort to ensure the contents have been compiled or derived from sources believed reliable, and contain information and opinions that are accurate and complete; however, Crawford makes no representation or warranty, express or implied, in respect thereof; takes no responsibility for any errors that may be contained herein or omissions; and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Crawford reserves the right to modify its current investment strategies and techniques based on changing market dynamics or individual portfolio needs.
 
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