Crawford Economic & Market Environment (Slides)

The Firm's Outlook: Summary and Conclusion

The Economy

After another above-trend year of Gross Domestic Product (GDP), growth is now giving signs of slowing.
Softness is showing up in retail sales, housing, and manufacturing.
President Trump and Treasury Secretary Bessent have a new economic agenda. It is aggressive and some parts of it are causing confusion and hesitation.
Consumer confidence is weakening.
Inflation’s decline has stalled. In response, the Federal Reserve (Fed) has halted its monetary easing in order to assess the path of inflation and the inflationary impact of tariffs.
The Fed has reduced its forecast for economic growth this year and increased it for inflation. However, they still forecast two interest rate cuts this year.

Stocks & Bonds

After two stellar years in 2023 and 2024, stocks are facing resistance this year.
Stocks are reacting to signs of slowing economic growth and confusion about the rollout of the Trump economic agenda.
Stock market leadership appears to be shifting. The emphasis on a few large dominant companies is giving way to a broader range of stocks.
Quality as an investment characteristic is performing well thus far in 2025.
Bond yields have been declining this year. Softer growth and tariff uncertainty are pressuring rates lower.
Inflation remains as the most important factor in determining the longer-term level of interest rates. If inflation resumes its decline this year, it is likely the Fed will reduce interest rates further.

The Economy: A New Agenda

Treasury secretary Bessent has articulated a three-point economic plan. It is called the 3-3-3 plan.

This is an aggressive agenda. Achievement of these targets will require significant changes in economic behavior.
If successfully implemented, it would:
- Raise standards of living (higher GDP growth)
- Restore a measure of fiscal probity (reduce the deficit, require less bond issuance, and perhaps reduce long-term interest rates)
- Reduce inflation (lower oil prices)

Increasing growth through less regulation and lower taxes, while implementing major cuts to the budget and increasing oil production, in some ways work against each other.
These goals are probably too ambitious to be completely achieved. If some progress can be made toward their achievement, it would be constructive for the economy and financial markets.

GDP Growth: Challenges and Opportunities

Achieving sustained 3% growth in GDP would defy conventional wisdom as to the economy’s potential.
Recently, however, GDP growth has been near the 3% target, averaging 2.85% over the last 12 quarters.
Achieving sustained 3% would require either or both of the following:
- Increased population and immigration growth.
- A significant improvement in productivity.
Although yet undefined, productivity may be benefitting from widespread usage of Artificial Intelligence (AI).
Population and immigration seem unlikely candidates for success, given current immigration restrictions and declining demographics.
3% GDP is a worthy goal. Standards of living would be materially increased.

Budget Deficits of 3% of GDP: Challenges and Opportunities

Budget deficits are a fact of life. Small deficits are not harmful if nominal GDP growth is faster than deficits as a percent of GDP.
The effort to reduce federal deficits is laudatory. Any progress on this front would be a significant development.
U.S. budgetary status has been deteriorating for a long time. If not improved, at some point it will likely lead to a bond market crisis.
The difficulty of deficit reduction is that a small percentage of the budget falls within the discretionary category. The remainder of the budget (social safety net and defense) are essentially untouchable. This leaves little room to reduce spending.
Another factor: reduced government spending directly limits GDP growth as it now accounts for almost 20% of GDP.
Conclusion: budget reduction is a difficult challenge, especially in the face of reduced taxes.

Increased Oil Production: Challenges and Opportunities

The goal of increased U.S. oil production is to lower the price of oil and help reduce the inflation rate.
Note that the U.S. is already the largest oil producer in the world by a substantial margin. The U.S. produces almost as much as the next two largest: Saudi Arabia and Russia.
Oil companies will have to cooperate. While they are happy to have a more friendly drilling environment, they also object to lower oil prices.
Note: very low oil prices usually occur during periods of economic stress.

The Economy: Consumer Confidence is Key

We feature the consumer confidence charts frequently because of their importance. They gauge the consumer’s level of confidence and thus their willingness to spend or save.
- The rundown of spending resources by consumers may be inducing caution.
- The onset of a new economic agenda and confusion around its policy implementation is assumed to be leading to caution.Recently, confidence has weakened considerably. There are several potential causes:
- Inflation’s decline has stalled and inflation expectations are rising. Fears of higher prices can impact future spending plans.

The Economy: Signs of Slowing Growth

The U.S. economy has been on an upward glide path for several years.
GDP Now is forecasting a negative quarter.
Now, there are indications that the economy is losing steam.
- Retail sales have turned down.GDP growth has been above average.
- Housing starts remain weak.
- Economic Surprise Index is weak.
For now, the economy is still in forward mode, but the slowing trends need to be monitored.

Monetary Policy: The Fed's Next Move?

The Fed’s desire to further reduce short-term interest rates has been stymied by:
- Inflation’s failure to continue its decline toward 2%
- Uncertainty over the impact of tariffs on inflation
Recently, the Fed reduced its outlook for growth this year and increased its outlook for inflation.
Despite these changes, the Fed is still projecting two 25 basis point cuts this year.
The Fed is still maintaining its target of 2% inflation. We consider it an economic imperative that they stick to this target and achieve it.

Long-Term Interest Rates: Keep Your Eye on the 10-Year

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Secretary Bessent has been focusing on the yield of the 10-year treasury note. He considers lower longer-term bond yields to be a critical element in the Trump economic agenda.
Rightly so, for the 10-year yield influences so much business activity, particularly housing and investment.
The 10-year yield has declined recently, reflecting a softening economy. However, the term premium has been rising, indicating that investors are demanding a higher yield for owning longer maturity bonds. They sense that risks are rising.
If the Fed achieves its 2% target for inflation, it will be a positive influence towards lower long-term interest rates, more so than lower short-term interest rates.

What's Up in The Stock Market: A Change in Leadership

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The stock market appears to be undergoing a major change in leadership. Since beginning last summer, this change picked up momentum in the first quarter.
The above chart highlights the significant outperformance of lower volatility stocks in the first quarter.
Lower volatility is generally a characteristic of quality, and by inference identifies quality as a central characteristic of the new leadership. It is difficult to know how lasting leadership changes will be, but we note that quality has always distinguished itself in uncertain times.

The Stock Market: Good Fundamental Support

We compare the long-term growth rates for the stock market, corporate profits, and personal income.
Corporate profits have expanded at a healthy pace and these earnings have increased in value as Price-to-Earnings ratios have expanded.
The difference in growth rates may explain to a degree increases in income and wealth inequality. Wealth continues to flow to the corporate and stockholder sectors.
We note the rise in money market funds as a percentage of total financial assets. This resource may move into stocks and bonds at some point, supporting future gains.
The valuation picture for stocks is complex. Valuations are high, but economic and corporate success may justify higher valuations.

The Stock Market: Follow the Earnings

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Over time, earnings growth and price growth move in rough parallel. Note above that price has been advancing more rapidly than earnings. This has resulted in higher valuations.
Earnings growth is expected to be positive in 2025 and 2026. If so, shares should advance, all things being equal.
Profit margins have been expanding for years, a significant contributor to earnings growth.
We remain confident that future earnings will drive stock prices higher.

Disclosure statement

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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Economic and Market Environment

Second Quarter 2025