I recently attended Financial Planning Associates (FPA) 2010 Annual Symposium & Sponsor Expo in Charlotte, NC. I attend the FPA Symposium each year simply to keep up with my continuing education credits. Dr. Robert (Bob) Froehlich was one of the presenters in the Symposium. I am writing this to specifically document what Dr. Bob had to say in his presentation because 1) what he suggested holds true for the future, and 2) it makes sense for small businesses.
When general consumers think about the stock market, they use it as an indicator of how well the economy is doing. Yet many investors use the stock market as an indication of whether to buy or sell from their portfolio. According to Dr. Bob, what matters in investing are the EARNINGS of publicly-traded stocks. Earnings are the only indicators to drive the overall stock market volume. If earnings go up, expect to see the market volume go up.
“There is no correlation of the housing market with the stock market,” said Dr. Bob. “In 1999, the housing market reached a 25-year high, unemployment was at 4% – the best in 40 years in the U.S. – but the market crashed at 2000,” Dr. Bob continued. He concluded that housing and employment really do not drive how the stock market fluctuates.
I guess this is logical – if publicly-traded companies show earnings, that indicates they are profitable and performing as their shareholders expect. This potentially will lead to issuing dividends and greater return on investment for the investors. When publicly-traded companies issues dividends, traditionally it drives up the buying volume as well.
Dr. Bob believes that the combination of the earnings and cash inside these public trading companies will fuel the overall economy:
- Increase of on-going inventories rebuilding for the next 18 months. In January 2010 the recession recovered 10 months earlier than expected. Most corporations had cut back in inventory orders during the recession, but today the demand is high and they’re very busy refilling their inventories.
- Increase of capital spending. As of June 20, 2010, there were approximately $600B undistributed corporate profits or cash, the highest since 1950. Examples of this include: the buy back of company stock, increase in dividends, mergers and acquisitions (M&A) in cash, investing in themselves to increase productivity and market share, and the hiring of employees.
- Growth of global economy. Traditionally, the global economy has trended to about 3% growth in the past 25 years. Today, the growth rate is about 5%, primarily due to huge growth in China (11.9%), India (double digit growth) and Singapore (19%). (No, the failure of the economy in Greece does not make whole lot of difference in the global economy.)
Dr. Bob suggests overweighting dividend-paying stocks in equity holding of a portfolio within the following three segments:
- Health Care
One reason for this recommendation is due to the amount of fixed income and the growth of boomers’ portfolios. Boomers not only need income, but also the growth of their portfolio to ensure that they don’t “outlive their money” (potentially for 30+ years).
What does all these mean for the small business? Consider the following:
- Gain Market Share FAST. If your marketing or sales teams are not already doing so, get on the program fast, because if you can’t fill the order for a hungry corporation, someone else will.
- Make sure your operating systems are solid. Ensure your processes and resources are in line to handle this upcoming boom.
- Get the right people on your team. You need a team of the right people to ride the economic tide. After all, they are the largest asset you have that can help grow your business.
You can have full access to the Federal Reserve monthly Economy snapshot – for example, I am part of the Federal Reserve Bank of Richmond. What they do best is provide historical information. However, their snapshot will also will provide insight into how to forecast the economic future.
I don’t know if Dr. Bob is right or not, but his points certainly sound very logical, given all the facts from the economy snapshot. The bottom line is to pay close attention to what your clients are doing. Don’t miss your opportunity.