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Mar 30, 2020
For many of us, the first time we heard the term “green shoots” was on March 15, 2009 during a 60 Minutes interview with the Federal Reserve Chairman, Ben Bernanke. Chairman Bernanke was addressing the country in an attempt to instill confidence and reassure in the American people that the actions taken by the Federal Reserve were beginning to bring much needed stability to both the financial markets and the global economy. At the time, the U.S. stock market was down over fifty percent from the peak reached in October of 2007. It truly was darkest before the dawn, but for those that were attuned to Bernanke’s comments, it proved to be an incredible opportunity if you had the fortitude to invest. The subsequent bull market would become one of the longest and strongest on record.
In terms of clear and absolute parallels between the 2008 financial crisis and today’s COVID-19 induced bear market, it is difficult to draw them since their origins are distinct, but we do see two definite similarities. The first being the massive stimulative actions taken by the Federal Reserve and our government. The second is the impact that a severe shock to the economy has on investor confidence and sentiment. Hopefully with the benefit of hindsight, we expect a third similarity will be that the appearance of “green shoots” will mark the beginning of the bottoming process for the markets.
Our search for “green shoots” has now centered on China where the COVID-19 breakout originated. We are trailing China by several months in terms of our awareness, response, and potentially the economic impact. To be clear, we do not see any near-term signs of a “bottoming” in the outbreak and severity of COVID-19 here in the U.S. In fact, we fully expect it to get worse before it gets better. We do however see initial signs of a return to normal in the companies we follow who have a significant presence in China. This week, Taiwan’s Foxconn, the top assembler of Apple’s iPhones, said it has secured enough workers to meet “seasonal demand” at all major Chinese plants, stressing a steady recovery from the labor shortage caused by the novel coronavirus epidemic on the mainland. In terms of businesses with more direct exposure to the Chinese consumer, McDonald’s has reopened 95% of its restaurants and Starbucks reported similar reopening statistics several weeks ago. After the markets closed Tuesday, Nike reported that sales for the quarter ended February 29th fell only 5% in Greater China with digital sales up more than 30% in the region.
While we would never predict a bottom in the market, nor listen to anyone who attempts to, we do gain encouragement that these initial positive signs are emerging from within China. Confidence will resume well after these shoots have fully bloomed and the market will anticipate that even before then. When we couple this with our analysis and assessment of the fair values of the individual businesses that we own and are following, we believe that history may be repeating itself or at a minimum beginning to start to rhyme.
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Note: The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.
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Chief Growth Officer