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We live in uncertain times. There are wars between Ukraine and Russia, Israel and Hamas, and wars in other places such as the South China Sea. Oil prices can sometimes soar above $100 per barrel. The US national debt currently stands at $34 trillion and rising. Analysts and economists are not yet sure whether we are headed for a hard or soft landing.
People remain concerned about further interest rate hikes by the Fed. It is still very likely that interest rates will at least stabilize at current rates and not fall further. Many families are drowning in bills as mortgages, rent, car loans, business loans, and student loans skyrocket.
Looking at these scenarios, the average small business entrepreneur, whether in a B2B or B2C business, wonders what will happen to them in such dire scenarios.
Related: I’m an Economist — Heading into 2024, you need to ask these questions about your business.
Debt is expensive and difficult to borrow
For many small businesses, borrowing money is difficult. In the short term, banks use overnight lending rates. For long-term projects, the lender uses his 10-year US bond as his one criterion for minimum expected return. The US government is considered an ironclad borrower, meaning it cannot default. If the U.S. commits to 5% on 10-year bonds, the proposed project would have to promise a much better return given the risk taken by lenders.
After all, why would you want to finance a project if you can comfortably hold onto a bond yielding about 5% or more per year for several years without risk? Borrowing money is more expensive these days. and tend to avoid risks.
Company finances need to be properly arranged
Small business owners wonder where to safely store their money in case something goes wrong. You can’t afford to run out of cash for payroll, operations, and maintenance, even if expansion plans are shelved for the time being for many. Funds needed immediately in the near future are likely to remain in cash (or cash instruments) to maintain liquidity. But assuming you have enough savings for future expenses, ideally the money you spend on it should earn interest or increase in value.
You need to get your company’s finances in place. US GDP growth probably won’t be as high as in previous years (excluding certain sectors like defense), but as long as portfolios and corporate finances remain viable and operational, they may be able to weather the recession.
Related: How to survive the unstable business funding environment
How should corporate finance departments position themselves?
Based on their current and future cash needs, each business or enterprise must maintain its financial structure to ensure that it is not short on cash at any time for at least payroll, operations, and maintenance, and to take full advantage of tax benefits. You need to decide how to arrange your ministry.
The stock market, especially the tech giants Magnificent Seven (NVIDIA, Microsoft, Amazon, Apple, Meta, Tesla, Google), is still doing well, but the rest of the S&P 500 is only being dragged down by these seven stocks. The Russell 2000 Small Cap Index has not performed very well because these small cap stocks (with some exceptions, of course) are the first to be affected by adverse economic conditions.
So if you’re thinking of investing some of your company’s funds in stocks, be careful. If a recession hits us (a hard landing), stocks that rely on consumer and corporate discretionary spending will be hit hard. For example, if a consumer wants to buy the latest iPhone on the market, but they don’t have the money to buy it, they won’t be able to buy it. That could affect Apple’s (and other tech stocks’) price-to-earnings ratios, potentially causing many tech stocks to plummet.
If you want to own stocks, especially if they pay dividends, try to acquire defensive stocks that are less susceptible to recession risk, such as healthcare or energy.
Many companies have assets such as equipment, factories, office space, intellectual property, and real estate. If the company runs out of cash, it can sell some of those assets. Depending on your earnings outlook and cash situation, you may be better off paying down your outstanding debt or refinancing it with a longer payment term and higher interest rate.
Related: Whether you’re 25 or 75, you need to understand this important retirement fund to keep your money inflation-proof
Due to the aforementioned uncertainties, many companies are holding higher positions in physical commodities than they normally would before a Fed rate hike. Short-term Treasury bills and Treasury bills may be preferable to long-term Treasuries unless you are certain that you will hold the bond to maturity and not sell it prematurely.
If you own bonds, beware of duration risk, like what happened to Silicon Valley banks. Their bank management decided to invest much of the money in long-term US government bonds. If you could hold these until maturity, there would be no problem. However, these bonds were forced to be sold before maturity as depositors wanted to cash out in bulk. Because the new high-yield bonds had a higher market value, banks were forced to declare that their asset values had fallen, and bank stock prices plummeted.
Once the SEC approves ETFs, Bitcoin will be an option if you’re comfortable with it, but keep it a minimal part of your portfolio to enjoy the upside without too much risk. please. Gold and silver are also options, especially if the financial system is truly disrupted. These precious metals have at least some value in any situation.
Small positions in defensive stocks, precious metals, and Bitcoin provide a hedge against the very distant failure of stocks, bonds, and the US dollar itself. However, the breakdown of assets and cash instruments that a company should hold will vary depending on the company’s circumstances, revenue outlook, and spending requirements.
Needless to say, we hope that no dire scenario occurs, but you may want to be prepared for all possibilities.
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