by John Fox, CEO & Chief Investment Officer
While we recognize that your attention is pulled in many directions these days, we hope that our weekly communications provide you with helpful insights into the short- and long-term prospects for our holdings and a national economic recovery. We also hope these updates give you confidence that the Fenimore team is working diligently on your behalf.
Last week, we began to see April’s economic reports. Retail sales, industrial production, and unemployment reports show the impact stay-at-home orders are having on the economy. Most economic indicators are setting records to the downside. Our country’s economy decreased at nearly a 5% rate in the first quarter, per the Bureau of Economic Analysis. Expectations for the quarter ending June 30 are that the GDP (gross domestic product) will show a record decline.
As always in a recession, stock markets are looking to the future and trying to assess the nature of an economic recovery. Speculation abounds around what letter of the alphabet the recovery will resemble:
- Will it be a “V” — a quick decline and rebound?
- Will it be an “L” — a sharp decline followed by a long period of slow growth?
- Or a “W” — a roller-coaster ride with various attempts to rally only to drop again?
To gauge when an economic recovery may begin, the stock markets watch for those early signs of optimism that former Federal Reserve Chairman Ben Bernanke called “green shoots” during the Global Financial Crisis.
There are two primary sources that may provide clues on this topic:
- The first is to listen to corporate executives discussing their business. Last week, our investment research analysts learned the following:
- One major credit card issuer stated that 80% of their cardholders that skipped a payment are now back to making payments
- A regional department store chain that closed all their 280 stores expects 241 stores to be open for curbside pickup by the end of this week
- An international athletic apparel and shoe business reported that all their China stores are open and 40% of their European shops are open
- “High frequency data” is another way to analyze the economy. This type of data can be tracked weekly, daily, or in real time to identify changes in trends. Examples include:
- The number of travelers going through TSA airport checkpoints
- The amount of restaurant reservations that are booked online
- Tracking cell phone location data to know how much people are driving and if they are on the move (miles driven is an important indicator for certain retail sales and gasoline consumption)
- Hotel occupancy rates
Since the beginning of May, these data points are slowly trending upward.
In addition to reading corporate reports, participating in earnings calls, and monitoring high frequency data, Fenimore’s Investment Research Team continues to talk directly with the management of our holdings via phone and virtual meetings.
Based on this information and more, it is clear that 2020’s second quarter will show a record economic decline. As a result, a company’s financial durability — one of our four core investment criteria — is more important than ever. We continue to evaluate the financial strength of each of our holdings and their ability to emerge from this recession. Equally important, Fenimore is also assessing their long-term prospects — a hallmark of our process.
We are all searching for glimmers of hope around us, so please connect with our associates if you have questions, concerns, or just want to speak with a friendly voice. Please call 800-721-5391. Thank you.