You might not know this, but we’re in the middle of a bull market.
What’s this you say? Can’t believe it? Well it’s true and should be concerning.
In February over 16 days the market fell by 20%. It continued to fall from there. However, since March 23rd, the market has rallied by 27%.
Incredible, especially given what we know about economic output, right?
Well, according to The Economist, “One reason for this mismatch between the markets and the economy is that official attitudes to financial downturns have changed a lot since Andrew Mellon, America’s treasury secretary under President Herbert Hoover, argued after the crash of 1929 that downturns would ‘purge the rottenness out of the system’. Now central banks and governments respond vigorously to economic and financial trouble, and taxpayers may bear more of the burden of the crisis than investors. The swift partial recovery is just one way in which the bear market of 2020 has been an odd specimen.”
Nobody wants pain. Nobody wants to see people lose money and perhaps more. However, capitalism and the strong economic bulwark that it brings requires the “purging of the rottenness” every now and again.
“…Andrew Mellon, America’s treasury secretary under President Herbert Hoover, argued after the crash of 1929 that downturns would ‘purge the rottenness out of the system.”
However, besides the academic conversations surrounding macro and microeconomics (which are interesting, but necessarily actionable for the layperson) should small business owners, startups, and entrepreneurs be worried?
In short, while it’s never good to be worried, it is good to be cognizant of the extreme volatility that isn’t just facing stock markets around the world but the mismatch between the upward momentum of stock markets and the economic slowdown in the “real economy”. So what are two things that you as an entrepreneur or business owner can do?
Cash is king: If the sudden downturn caused by the coronavirus didn’t convince you that it is important to have enough cash on hand to weather economic storms, I don’t know how to help you. However, if you did learn this important lesson, there is a significant difference between liquidity and cash. Sure, cash is one of the most liquid of assets, but stocks are generally regarded as a highly liquid asset as well. While significant deflation and inflation can and would wreak havoc on cash savings, these macroeconomic events would also have a significant negative impact on almost all assets. Yet, as the stock markets rise, some business owners and others might have an impetus to move cash they have into the stock markets for quick returns. While an investment portfolio should have cash on hand to take advantage of market dips, this cash should be separate from the cash that you have in reserve to support your business operations.
Bottom line, keep your cash as cash. Don’t think that rising stock markets are indicative that the current severe economic strains placed upon your business are going to rapidly go away.
Employ Strategically: In part, because of the massive direct federal government unemployment assistance, the US has not seen significant wage deflation during the coronavirus. However, as furloughed and fired employees, who are making less on unemployment then they would if employed, will begin applying for jobs that are actively hiring, employers might be tempted to either pay below market rates to fill current vacancies or snap up employees to fill roles which support growth. However, many small businesses and startups fell into the hiring to support future growth rather than realized growth trap, which depleted operational cash reserves and has resulted in them needing to fire and/or furlough employees.
Bottom line, if you’re paying below market wages today, your employees will leave as economic conditions improve. Secondly, stop hiring for future growth that has not happened. You should feel some of the strains that business growth causes, before hiring a person to mitigate growth strains that have not yet occurred.
Joshua Lawton-Belous is a 4X founder with 3 exits and is an angel investor. You can follow him on Twitter @AlertingMainSt and connect with Josh on LinkedIn.
Joshua is not a financial advisor and for all purposes you should consider him to be a moron who is ignorant of everything. So, before making any financial, business, life, etc. decisions speak with someone you trust and who is qualified to provide you with advice.