“I’m a slow walker, but I never walk back.” – Abraham Lincoln

By Paul Hogan

The U.S. economy continues to improve, albeit slowly, and has worked its way out of the Great Recession. The improvement has been lumpy and is anything but a straight line. Last year we saw economic growth partly due to government stimulus programs and now we are transitioning as those initiatives are ending and the economy stands on its own.

On the positive side, the U.S. is in better shape than a year ago. Consumers have made good progress deleveraging and we have seen a savings rate over the last three years that is higher than the previous decade. This is a healthy trend over the long term. In the near term, consumers are still spending but are much more sensible with their purchases. Additionally, retail sales are climbing and even big-ticket items – such as automobiles – have exceeded expectations. Manufacturing continues to rebound smartly due to the weaker dollar and global demand, including parts of Europe. On the negative side, private sector employment growth is slowing down and the housing market is still stuck in the mud.

From an investment standpoint we believe the economy will continue to grow, but at a slower rate than earlier economic forecasts. Slower growth is okay and certainly better than no growth. While this change in expectations disappointed the stock market, investors can still make acceptable investment returns under this scenario.

Deploying Cash Wisely

Corporate profits have been very strong over the last 18 months. This means that many companies have earned a lot of cash that, if left in the bank, is likely earning less than one percent. Management teams that look to increase shareholder value must deploy cash profits wisely. High on this list is buying other businesses, buying back stock, paying down debt, and paying dividends. We have seen a big uptick in merger activity this year as well as buybacks and dividend increases. We have even seen large special dividends. Due to slower economic growth, businesses will likely step up their efforts to deploy cash and drive shareholder value.

Our investment strategy has always been to invest in quality companies that generate more money than is needed to reinvest into their operations. We also like businesses that serve the U.S. market as well as faster growing foreign markets. We expect these enterprises to continue to expand through this environment and use their cash to enhance shareholder returns.

Please see Fenimore disclosure.