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September 2021 | Quarterly Letter

John H. Crawford, III
Oct 15, 2021


During the third quarter, investors were processing various economic and market information in a positive light until late in September. At that point both stock and bond investors began to evidence concern, and the result was falling stock prices and rising bond yields. While these late moves in the markets took the shine off quarterly returns, both asset categories produced total returns for the quarter at just about breakeven levels. Looking ahead, we discuss the outlook for both asset categories below.

A trend is a trend is a trend.
But the question is, will it bend?
Will it alter its course
Through some unforeseen force
And come to a premature end?
- Alexander Cairncross

Alexander Cairncross, a 20th century British economist, wrote faithfully within the confines of his discipline. However, he was also capable of a light touch, as illustrated above. On the subject of trends, he adopts the limerick form and provides us with an introduction to a discussion of trends in our two most important subjects: stocks and bonds. Trends occur over varying periods of time, and the answers to his questions are yes and yes, trends can bend and they can end. Let’s apply these questions to the trends in stocks and bonds. For purposes of discussion we will observe the trends in these two asset categories since 1980.

THE TREND IN STOCKS. Choose any period over the last 100 years or more, and with the exception of brief periods of recession or depression, the trend in stock prices has been upward. We focus on the last 40 years and note that common stocks as represented by the S&P 500 have compounded at an annual rate of slightly over 11%. This is marginally above the longer-term trend of around 10%. We believe both of these numbers are sufficiently strong to qualify as wealth builders. Investing in stocks over the long run has been a very profitable venture. Savers have a tremendous opportunity to avail themselves of very attractive investment opportunities in stocks.

Can the trend bend? Of course. It can bend in ways that try the patience of investors and the sustainability of any investment program. The upward trend in stocks bends slightly in corrections and bends even more dramatically in bear markets. Stock investors who want to participate in the long, upward sweep of stocks pay a price for the attractive returns, and that price is volatility, a fact of life in stocks. Over the 40-year period we are reviewing, there have been 10 corrections of 10% or more and 7 bear markets of 20% or more. The average decline in these bear markets was 35%, and some were especially difficult. Recall the 52% top-to-bottom decline in the 2008-2009 bear market. Such periods require a very strong commitment to long-term investing, an appreciation for the resilience of our economic system, and the ability of the corporate sector to take advantage of favorable economic circumstances.

Can it end? Possibly, but not likely. As to the question of why stocks have continued in an upward trend over such long periods, one has to examine the economic system that companies operate within. It is a system founded on the concept of growth. Perhaps it is a forgotten fact, but in the centuries prior to the Industrial Revolution the economies of Europe experienced almost zero economic growth. Only with the advent of machines and the emergence of capital investment as a driver of economic opportunity did economies as a whole begin to experience growth. In our country, as it was built out and became the leader of the world in technological development, economic growth was assumed to be our birthright. While growth over recent decades has been slowing, it has ultimately been sufficient to enable companies to prosper and grow their businesses.

Growing businesses are the lifeblood of stocks. One of the remarkable developments of recent decades has been the ability of the corporate sector to drive their profits higher at a rate that considerably exceeds the growth rate of the economy. Overall corporate profits as a percentage of Gross Domestic Product (GDP) have risen from less than 4% in the early 90s to more than 12% now. It is debatable how far this trend can be extended, but unless the corporate sector begins to shrink, the upward trend in stocks is likely to persist. Yes, the trend is up over the longer term, it can bend over shorter periods, but it is not likely to end.

Stepping aside from the 40-year period and focusing on a shorter term, we note that the upward trend in stocks has been accelerating. Over the last five years ending September 30, stocks have compounded annually at just a shade under 17%, an extraordinary rate. Valuation measures are higher than normal, and the economy, in our opinion, is transitioning back to a more normal growth rate of around 2% in real terms. This transition is likely to take a few years, and while investors seem to be assuming the transition will proceed smoothly, there are risks. Going from a Covid-19 economy to a post-Covid-19 economy is proving to be a challenge. As a word of caution, it is worth considering whether such abnormally high equity returns from recent markets have been, in effect, borrowing from future returns, thus implying a less dramatic return pattern for a while, at least. We feel investors are always better served by holding reasonable expectations for future returns.

THE TREND IN BONDS. Like stocks, bonds have been very rewarding investments over the last 40 years. A lot of this has to do with the starting point. In 1980, the yield on the 10-year U.S. Treasury note was in the 15% range, and it has been trending down ever since. The combination of high coupons plus capital appreciation from declining yields provided bond investors with well above-average total investment return. Over this period the Barclays Government/Credit Index, the most widely accepted bond index, compounded at over 7%. A return of 7% on bonds compared to 11% on stocks is very respectable, considering the lesser amount of risk in bonds.

Can the trend bend? Of course, but it has not bent very much. Over this 40-year period there have been only four years of negative returns from bonds. Temporary spikes in yields provided these adjustments in return, but they did not last very long. In summary, the last 40-year period has been about as good as it gets for bonds. And, the good fortune for bond investors has spilled over to stock investors. It is no coincidence that the bull markets in stocks and bonds have occurred simultaneously. The consistent decline in interest rates has been a powerful tailwind for equities.

Can the great bull market in bonds end? Unlike our answer for stocks, we believe the long-term downward trend for bond yields can end. Consider the fact that by nature bonds are inert, that is, they are fixed, unlike stocks that provide ownership in organic, dynamic enterprises that can grow. Fixed income has no control over its future; rather, it is solely dependent on the level of interest rates. Also, the trend toward lower bond yields can end if for no other reason than bond yields have declined so far and are so low. For instance, the benchmark 10-year U.S. Treasury note hit its low yield in the summer of 2020 at 0.50%. It now trades at a yield of around 1.50%. There is always the possibility of bond yields continuing to decline into negative territory as they have in other countries, but we believe this is not likely in the U.S. If we are correct about this, it means that yields have gone about as low as possible. We are quick to note that over the last 40 years many forecasters have tried to predict the end of the bond market trend, only to be thwarted by further declines in yields. We believe a lot will depend on when the next recession arrives and where interest rates are at the time. We shall see.

The downward trend in bond yields may be over, but that does not mean the era of low interest rates is over. We acknowledge that Fed policy is about to change. The plan is to begin to taper quantitative easing in the months ahead, and, following that, if favorable economic conditions remain in place, increases in the federal funds rate will begin. Even though these changes will be implemented gradually, they imply higher interest rates in the future. How high depends on many things, both cyclical and secular. We tend to overweight the secular issues, those ongoing, long-term trends that may be temporarily overwhelmed by cyclical issues, but in the long run will consistently exert downward influence on interest rates. Among these secular trends are a sustainable growth rate for the economy of around 2%, unfavorable demographics, and a savings glut resulting from extreme income and wealth inequality. Given these secular forces, it would appear difficult for interest rates to move substantially higher.

Bond investors should keep two things in mind. First, bonds provide income, and second, they offer diversification benefits. Replacing income from bonds can be accomplished by moving to other asset classes. What cannot be replaced is the downside protection that high quality bonds offer in a balanced portfolio. The poor returns for stock investors during the corrections and bear markets referenced above would have been mitigated to a considerable extent if paired with bonds in balanced portfolios. Admittedly, the diversification benefit has been diminished somewhat by the fact that yields are so low. Nevertheless, before abandoning bonds, investors should consider the diversification advantage that high quality bonds offer.

CONCLUSION. At our firm we invest for our clients in equities and fixed income instruments. Each client has their own investment goals and objectives as well as their idiosyncratic tendencies toward investment. Their risk parameters vary. In this letter we have delineated the virtues of investing in both categories. We have also issued words of caution over the shorter-term horizon. For those with higher tolerance for risk, we advise higher equity participation. For those with less risk tolerance, we favor the more conservative approach with high quality bonds. For many of our clients a more balanced approach is appropriate.

Whether the choice is equities or fixed income or some blend of each, we insist on quality as the fundamental characteristic of the portfolio. We believe quality is the ultimate risk moderator and provides the best opportunity for longer-term wealth accumulation.


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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