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Despite stock market craziness there is hope for businesses
The recent volatility in the stock market has been due to a number of uncertainties: the debt crisis in Europe, uncertainty over growth of the U.S. economy, and uncertainty regarding government policies both here and abroad. If there is one thing investors hate, it is uncertainty, and the greater the uncertainty, the greater the market volatility.
The same uncertainties that roil investors also have a significant impact on CEO and business owner confidence. Uncertainty can result in hesitancy on the part of companies and business owners to hire new employees or invest in new factories and equipment. It can also create a “negative feedback loop,” such as we are in now, which reinforces business owners’ decisions not to hire and invest.
Despite these uncertainties, there are some reasons to be hopeful. First, we have emerged from prolonged, difficult recessions in the past. Following the 1980-82 “double dip” recession, which was precipitated by a depression in the U.S. industrial sector, our nation emerged with a much more efficient and financially strong industrial base. Second, the Federal Reserve recently announced that it will continue to remain accommodative in supporting the economy by keeping short-term rates fixed through 2013. This should create added incentive for banks to increase their lending, particularly to businesses, which could improve the pace of corporate spending and investment. Third, there is significant pressure on both the United States and Europe to address their current debt and fiscal problems. Making some constructive progress on addressing these issues would provide some additional clarity for business leaders on the global economic front, which could result in greater willingness to hire and invest. Fourth, corporations remain very strong financially and are currently generating record earnings and cash flows and now hold nearly $2 trillion in cash. The strength of corporate balance sheets and cash flows represents an important financial resource that could be put to work in the economy as business leaders become more confident.
Recent economic data has been mixed and points to some near-term slowing in the economy. The good news, however, is that the economy does appear to be growing, albeit slowly, and recent data on employment, retail spending and industrial production support the slow growth thesis. If the economy can accelerate a bit later this year, which is possible, we don’t think it would take a big jump in business confidence to lead to moderate improvement in hiring and capital spending at larger companies. Once hiring and capital spending at larger companies improves, we would expect to see a “trickle down” effect as consumer spending gradually increases, which in turn should improve sales at the local business level.
Bob Toomey is Vice President, Research for S.R. Schill & Associates, a registered investment advisor located on Mercer Island.