Why the Recent Stock Slide Adds to Small Business Uncertainty
It's often hard to picture the bright red line connecting global stock markets, especially those in emerging countries, to your business.
After all, your company's not likely to be publicly traded, not yet anyway. Nor is it necessarily going to be affected by what's going on thousands of miles away.
So as markets seesawed on Monday, trying to sort through a global rout stretching from Western Europe to China that also nabbed more than 300 points from the Dow on Friday, you may be wondering how global market weakness will affect you and your company.
Primarily, global uncertainty will only increase doubts at home. And U.S. entrepreneurs have been living in a tenuous environment since the recession started five years ago. Unemployment is still high, at 6.7 percent, and more than a million people lost their unemployment benefits in December, which is destined to take the wind out of the economy's sails. There's the endless partisan squabbling in Washington, and lots of questions linger about the cost of health care following the Affordable Care Act rollout. And then there's the steady rollback of the Federal Reserve's policy of quantitative easing, which aimed to stimulate the economy with low interest rates and increased monetary supply.
That would seem to be enough for one year. Now add in a wobbling indexes.
"The stock market rout could lead to a loss in consumer confidence, [and] that will have a negative effect on small businesses," says Victor Fung, senior economist for John Dunham & Associates, an economic research firm that works with small businesses.
Consumer confidence has already been on the wane. The retail sector, which is seen as an indicator of consumer perception, dropped in the second and third quarters and was essentially flat in the fourth quarter of 2013 says Fung. (Department store sales for the fourth quarter were about $43.5 billion.)
A number of small business confidence reports also depict entrepreneurs' uncertainty about 2014. Wells Fargo's most recent quarterly survey showed that nearly one third of respondents said they were less optimistic going into this year than they had been in 2013.
You may also sell your products overseas. So just like here, a weak stock market abroad could lead to diminished confidence and buying power in foreign markets. What's more, the world economies are also so intertwined today, that problems overseas have a way of finding their way back here pretty quickly.
"Though 2014 has just begun, the economies of the world, particularly those of the West, remain on quite shaky ground," says Jonathan Citrin, founder and executive chair of investment advisory CitrinGroup and an adjunct professor of finance at Wayne State University. "Investors, and therefore potential customers and clients, are looking for signals of strength or weakness."
And there are worrisome headwinds. Among others, some experts contend that the gradual conclusion of the Federal Reserve's quantitative easing program, which injected $85 billion per month into the market through bond repurchases, could have a negative ripple effect.
"A substantial amount of quantitative easing money is invested overseas," Fung says.
It' s not all bad news, however. The U.S. stock market may have gotten too frothy in the past year. So letting some of the air out of it could be a good thing, say some experts. Several startups, such as Twitter, have been slammed for outsized valuations relative to earnings. In Twitter's case, for example, the company has never been profitable, yet it was valued as high as $50 billion in early January, when its stock traded near $70, an increase of about 170 percent from its opening day in early November. Its stock value has fallen to $57.61 as of mid-day Monday.
Additionally, the rout may not be as widespread as it seems. So-called frontier markets--considered "pre-emerging"-- such as Bangladesh and Kuwait don't seem to have been as affected by the global downturn. The Russell Frontier Index, which tracks stocks in such countries, fell 1 percent Friday, when the S&P 500 declined more than twice as much.
So while the current global unease is far from fatal, it's best to keep your eyes open.
"Small businesses these days must watch more closely than ever as fluctuating prices will impact buying decisions directly," Citrin says.