When Stock Markets Affects Small Business…
Highly unpredictable political landscapes and threats of economic recession are scary–to individuals, business owners, and particularly investors. Before the presidential election of 2016, predictions for 2017 were not optimistic. The general consensus was that financial markets would tumble causing recession. There were widespread concerns about the future of U.S. trade policies, with some hope that the negative aspects could be partially offset by the prospect of lower corporate taxes and other business-friendly strategies such as deregulation. Proposed tax cuts and spending increases on infrastructure were viewed as possible economic boosters, providing that these promises would become formal policies and be properly implemented.
The reality proved these predictions wrong. Stock market growth accelerated wildly, with the Dow Jones Industrial Average recently passing the 22,000 mark. The increasingly unstable political scene had little effect on investors’ behavior–a consequence described by CBS Money Watch as “weird” (http://www.cbsnews.com/news/stock-market-grows-increasingly-weird-record-highs-dow-jones-industrials-nasdaq/). It seems that large investors abandoned normal investment behavior and created their own, short-term rally to capitalize on the window of opportunity, raising some stock prices more than 300%.
This will not last long. Adam Posen, who served at the Federal Reserve Bank of New York in the mid-90s, said that GDP (gross domestic product) growth targets of 3 percent or more are unobtainable given current productivity and employment rates in the U.S. Combine that with the proposed tax cuts and financial deregulation under Trump, and the country will find itself trapped in a boom-bust cycle, says Posen (https://www.cnbc.com/2017/03/28/us-heading-for-recession-after-2-years-of-unsustainable-growth-economist-says.html).
How does this unsteady economic climate affect small business? A great deal. When investors are buying stock, corporations can sell their products, jobs are plentiful, and purchase orders are getting larger. When the opposite happens, investors’ poor confidence and negative expectations result in sell-out conditions which may be dramatic. Since the vast majority of small businesses generate their revenue from larger companies and corporations, the effect is immediate and sometimes devastating.
Consider the housing crisis of 2008. It put a tremendous number of construction companies and developers out of business. However, they were not only ones who suffered. Demand plummeted for anything related to the construction industry, like lumber, appliances, building materials, etc. Many small businesses like electricians, plumbers, small suppliers, and manufacturers didn’t survive. Furthermore, the credit markets locked up and it became impossible to get a loan, for individuals and businesses alike.
Small businesses drive our economy, so the onus is on them to pay more attention to financial markets for their own survival. They needn’t feel compelled to conduct in-depth analysis, but simply to be aware of signs that may impact their business performance and sustainability.
What should small business owners do? These are just a few recommendations:
- Make a list of companies that, combined, are responsible for 50% of your revenue. Run two reports on these customers, comparing Fiscal Year-to-Date as Percentage of Revenue for this year with the same period of the last year. If the year-over-year percentage is in the double digits, further analysis is required to understand why. Ask yourself whether that growth is sustainable.
- Determine to which industry your customers belong and, if applicable, where they are listed – S&P 500, or NASDAQ. They may be included in the Dow Jones Industrial Average. If, for example, your business makes parts for Caterpillar (NYSE:CAT), check their 52-week performance. At the beginning of 2017 their stock was down due to less-than-expected earnings, but improved earnings in the second quarter drove the stock up. The company beat estimates on both EPS (EarningsPer Share) and revenue. There is also a risk factor. Investors want to believe that construction of the wall with Mexico will take place, thus increasing demand for heavy equipment. The bottom line here is that suppliers to Caterpillar, at the beginning of the year, are more likely to experience (change to experienced) erratic demand or a lower number of POs either in value and/or volume. Increased orders in the second quarter may not be sustainable, thus a cautious approach to capital investments and operating capital is necessary.
- Major layoffs usually make news on the local or national level. Such announcements are indicators of major changes within a particular company or the industry. It takes almost no time to find out if your business may be affected.
- Keep ongoing good relationships with buyers and procurement managers. They are an excellent source of information. They may not provide in-depth answers, but listen closely to their assessment of the situation.
- Assess the risk. There are companies that specialize in risk assessment. Dun and Bradstreet is the most known but is also quite expensive. I am using Argos Risk www.argosrisk.com. Their services are excellent and very affordable.
In a fast-paced, changing environment anxieties are easily triggered. In the face of uncertainty, it’s not unusual to feel hopelessness and resignation. Some victims of economic turmoil may throw their hands in the air, protesting “I didn’t know what’s going on and I did the best I could to survive.” While it’s true that the dynamics of the national and global economy are beyond your influence, you do have the option and the responsibility to be proactive and aware.