Updated: Jul 15, 2020
By Steven Davidson
Now more than ever, small business owners need to pay attention to all aspects of the economy to plan for their future. In the interest of monitoring how the economy is doing during the pandemic, something that has shown up on many people's radar is the recent changes in the stock market. The market has been experiencing a few hopeful rises and record highs; there appears to be a showing of economic stability and even growth as we continue to battle the viral enemy. So, what does this mean for small business owners and how can this help them make it through the current state of the world? As this article will discuss, there are several reasons for paying attention to the current state of the stock market.
Overview of the Recent Stock Market Changes
When the Coronavirus first began affecting our way of life, the S&P 500 index was above 3200, the highest valuation level since before the dot-com bubble burst nearly 20 years ago. Investopedia describes the S&P 500 index as a valuation of the current market by taking the sum of the top 500 corporations stocks divided by an index divisor of S&P. This was a strong showing of economic growth, which makes the hit of Covid-19 so bitter. From late February until early April, the index dropped over 1,000 points before beginning to rise again. As of June 17, 2020, the index sits at 3113.49, a significant increase from its 2200 in April and close to pre-Covid levels.
Similarly, the DOW, or Dow Jones Industrial Average (DJIA), has been experiencing a rapid increase, rising 31.26% over the last 3 months and 6.28% in the last 30 days. Similar to the S&P 500, the Dow is calculated by taking DOW’s 30 corporations combined single-stock value and dividing it by an evolving factor. The factor varies depending on changes in the market. It has risen by over 8,000 points since its initial Covid-19 related drop in March, capping at 26,119.61 at the end of June 18, 2020.
What is Causing the Current Increases?
How exactly are these indexes showing stock increases even as businesses remain confined to partially and fully closed states? These indexes contain many tech companies, like Facebook and Amazon, but there are plenty of companies used in these indexes which do not have major online presence for business. The DOW, for example, has Boeing, Home Depot, and Walgreens in its evaluation, so even minor interferences in tech companies cannot shoulder the burden on their own. If this is the case, why have the indexes shown such promise?
MarketWatch has shared the main reason for the resurgence is the testimonies from Jerome Powell, a Federal Reserve Chairman. In his address to the Senate on the economic outlook of the Coronavirus, Powell shared that the Federal balance sheet has increased to $3 trillion for buying corporate bonds when it is necessary, as well as sharing 11 lending programs and an extension on unemployment insurance until the end of July 2020. Having the security of the Federal government to ensure stocks do not fall has provided incentive for investors to continue participating in the market. For small business owners, this means the stock market and economy are protected from sudden drops by the government, which means a greater likelihood of consumer spending. This will be explained in more detail below.
Powell follows up with these statements that the overall health of the market will depend on how the virus reacts during the reopening process and the development of medical treatments. Some states are beginning their next stages of reopening while some that have already done so are reporting record numbers of cases. Even so, the quick bounce back of the economy has many optimistic that the trend will continue.
For Powell’s full statement, click HERE.
What Does This Mean for Small Business Owners?
The rise in the stock market shows promise for the economy in general, but it also has a direct impact on small businesses and their owners. Here are a few reasons why small business owners benefit financially from the rise:
Investment Portfolios Increase in Value
Most obviously as a result of stocks rising, individual portfolios will increase in value. Business owners who have such portfolios directly benefit because the increase in worth gives them another option for funding their businesses. It may be a good time to consider pulling some money out of investment portfolios or keeping up-to-date for another spike before doing so. Owners also directly benefit from an increase in their retirement accounts. Normally, this would not be a viable funding option, but now Americans can pull up to $100,000 from these accounts without paying any early withdrawal fees. If owners have a need for capital without a loan program, taking advantage of the new value of their investments is a good place to turn.
2. Stock Market Rises Means Economy Will Follow Suit
The stock market is a good indicator as to the health of the economy. As the market goes up, usually the economy as a whole will go up as well. One reason for this is because many companies use stocks as a currency in place of cash, so the value of them is essential to keep those backings secure. But, why is a rise in the economy good for small business owners?
During times of a rising, or ‘bull’ market, consumers are much more likely to spend money. They, too, will see their wealth grow from their investment portfolios and be more willing to spend money where they can. This is good news for businesses with a good online presence, in areas with partial reopenings and essential businesses.
Unfortunately, this leaves out businesses which remain closed, but there is still some good news for those in this category. Economic rise will also mean businesses will be valued higher. Even businesses that are not traded on the stock market will see their ‘shares’ increase in value, which can be an important tool for owners. Small businesses that are considering expanding or finding new capital can use the higher evaluation of their business to find new investors without giving up as much stake in return.
A strong economy also means a general rise in production and a decrease in unemployment. Owners, who rely on other businesses for their resources, will have a greater access to them because their suppliers will be seeing growth as well. Unemployment will decrease and owners will feel more secure with their positioning. A strong economy means an easier ability to pay off creditors and secure more funding as well, which I will discuss below.
Investopedia has provided a good outline for direct impacts of the stock market on business economies; visit their site HERE.
3. Credit Becomes Easier to Acquire
With a rise in the economy comes a sign of relief for many creditors. Uncertainty about the market makes lenders more stringent on who they lend to and how they structure their offers. Since the market has been on the rise, small business owners can more easily find lines of credit and other funding options. Karen Mills, a former administrator of the SBA for President Obama, has confirmed this belief in an interview with Forbes. She stated that in times of a turbulent economy, smaller customers will find it difficult to find credit as readily as in a progressing one.
One of the best ways for a business to start a good line of credit is to incorporate, so small business owners may want to consider this moving forward. This allows owners to have their individual credit be separate from their businesses and provides protection of their personal assets should their business go into debt. Incorporation can also make your business more credible and allow for different tax breaks and incentives.
There are still many other ways to increase credibility, so for more information on building business credit, click HERE.
4. Larger Corporations Will Have More Money for Relief Programs
When the stock market is showing an increase on the DOW or S&P 500, it means the largest corporations are experiencing growth. Higher stock prices means more money to continue business activities and remain stable. Though this is merely speculation, this may be a good time to revisit corporations with established Coronavirus relief programs. Stocks returning to some level of normalcy give the biggest corporations the ability to refund their old programs or even start new ones. Google, Facebook, and plenty of other multibillion dollar corporations already opened programs for small business owners when the market was taking a dive and have stated they plan on adding to their already generous relief packages. To do so amidst a rise in their stocks would be perfect timing.
The rise will also put the large corporations that have applied for loans through the CARES Act into the spotlight. The NY Times reported back in April that lots of large corporations applied for and received a Paycheck Protection Program loan. Even the Los Angeles Lakers, who are estimated to be worth over $2 billion dollars, applied for the loan. They did, however, ultimately return it, but many other corporations have not. A rise back to a normal level will hopefully encourage some of these less deserving corporations to return some of the loans they have applied for, meaning more money for small businesses who actually need the PPP to help them.
Important Things to Note
Even though this strong resurgence of the stock market is providing hope for the economy, there is still concern over its future. Many states have begun the reopening processes and the number of cases is beginning to rise again, making the hopes of a full economic reopening look a little less bright. Jerome Powell has expressed that even though the federal government plans on backing the market with an exorbitant spreadsheet, the activity of the virus will be the determining factor for continued growth. Furthermore, Powell has stated the funds will not be unlimited and that the federal reserve will not be able to print unlimited money to fight the crisis.
Small business owners should still try to take advantage of the rise. Times of economic prosperity allow for anything from expansion to selling, but it is important to still be cautious. Relying too quickly on the economy to stay the course of recovery could leave owners in way over their heads. Too much rapid expansion or production could leave owners with a financial hole they were hoping would be filled by the increase in consumer spending. This is why it is important to stay up-to-date with the latest news about both the stock market and the state of the economy before making a move towards the future.
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