The opening phrase of Charles Dickens’ classic novel “A Tale of Two Cities” could be used to describe the stock market in 2018: “It was the best of times, it was the worst of times.” For many investors, the market was really a tale of two markets during the past year. As one analyst called it, it was a year of “extreme volatility.”
But does what happen on Wall Street translate to Main Street?
Not really, at least at first glance, some Southern Illinois market watchers say.
“Last year, for the first time ever, we saw a market where the S&P 500 was up for the first three-quarters of the year and then actually had a decline in the last quarter of 2018 that ultimately sent the market into decline for all of 2018,” said Tim Marlo, clinical assistant professor in the Department of Finance at Southern Illinois University Carbondale.
Marlo, who specializes in investments and serves as faculty adviser for the SIUC’s Saluki Student Investment Fund, says while a down market may make investors and stockbrokers uneasy, small business leaders should not fret.
“I don’t think there’s any causality between the market decline and small business,” he says.
David England, associate professor emeritus of finance at John A. Logan College, agrees.
“There’s very little effect on Main Street and one of the reasons is that so little of the populace is actually involved in the stock market outside of their pensions or retirement,” he says.
However, England cautions that a prolonged downturn could have an impact.
“If we get into a prolonged bear market, it definitely will,” he says. “Here’s how: the psychological aspects will have an effect. People, whenever we have prolonged selling and a down stock market, it impacts the consumer's mindset. When we get into an extended bear market, it will definitely affect consumer spending.”
Marlo agrees. He says a market crash or significant market decline affects shoppers.
“One of the big impacts is consumer confidence,” he says. “Often in those cases, a decline actually shows that there is going to be less confidence and less spending.”
Andrew Rogers, of Alliance Wealth Management of Carbondale, adds that even market investors might not want to get to concerned with a declining market just yet.
“It really depends on their strategy for their investments,” Rogers explains. “If we’re talking about someone who is 30 years old and is invested aggressively in the market, it’s good for them to know what the market is doing, but if they’re going to be holding these investments for another 15 or 20 years, a small decline is probably not hugely significant to them.”
Instead, both Rogers and England say a bigger concern should be how the Federal Reserve Bank treats interest rates.
“The Fed has been raising rates consistently, but there’s talk of them slowing it down a bit,” he says. “Raising rates could make it harder or more costly to borrow money.”
England explains further.
“Part of the role of the Fed is to, if we have a weak economy, put money into it and lower rates. If the economy is strong, they take money out of the economy. So what is happening right now is the Fed is pulling tremendous amounts of available funds out of the economy to slow it and to raise rates.”
He says everything is cyclical and eventually the economy will slow.
“It all goes into cycles and so small businesses have to be able to get through leaner times,” England says.
Marlo, who suggests that the Gross Domestic Product is a better barometer of the economy and consumer attitudes, has several recommendations for businesses to prepare for a tougher economy, whenever it comes.
“A stock market decline isn’t a recession. It’s just a decline. A recession is related to GDP and those definitely have an impact and often they are worse for small business. One of the things that a small business owner should really consider, especially those with startups, is that they often don’t have enough cash reserves,” he said.
“They’re trying to expand so quickly that they leave themselves dry and then all of sudden you have a bad month or one bad cycle and you don’t have enough cash to survive. Just like in personal investing, businesses need to have emergency funds to cover, just in case.”
“Small business must have reserves on hand to get them through leaner times,” England adds.
Additionally, Marlo says that even in good times, business leaders must be conscious of the bottom line.
“If you think there is a possible recession coming on, you probably don’t want to sign up for long-term fixed costs like loans or leases; you need to have more flexibility,” he says. “Additionally, you need to be able to get rid of costs if you have to and you don’t necessarily close a store.”
England has the same advice but puts it another way.
“For small business owners, what they’ve got to do is really, really sharpen their pencils to be able to survive and prosper in downturns,” he says.
Thirdly, Marlow says is to use times with strong economies to prepare for downturns.
“Especially when times are good, it’s really important to develop some bank relationships. I’m not necessarily saying borrow money or open up a credit line but start having that conversation.”
For Rogers, preparing for economic downturns is wise for small businesses, but he says a declining stock market doesn’t necessarily signal long-term trouble.
“In the whole perspective of things, we’re not talking about the market tumbling for two years,” he says. “We’re talking about the market having a few bad months right now. I don’t think we’re going to see a lot of impact right now on Main Street in small-town America.”