The classic reason a stock price rises is the positive performance of the issuing company, especially profitability growth. To look at the record levels of stock indexes you’d think the profitability of companies traded on Wall Street was also setting records. It isn’t.
Here’s an alternative reason stock prices are up: The Fed’s accommodative policies have made equities more attractive than other types of investments. You don’t have to be Warren Buffet to see that trillions of dollars of Fed quantitative easing, most recently at $87 billion a month, is making the stock performance of many companies look better than their CEOs deserve.
Recently there have been reports of rising profits among America’s small businesses. We wanted to know if our audience would support that news, so in our online poll we asked: “Some surveys indicate that small business profits are up. What is your experience?” Here’s what we learned:
Less than one-third of our respondents said they see an improved profit trend. The rest, 69%, allowed that they are not seeing a trend toward profitability. It’s likely that any spike in small business profits is more a product of operating efficiencies rather than growth. This profitability scenario from the sector that creates half of U.S. GDP, signs the front of over half of all pay checks, and creates the lion’s share of new jobs, does not favor economic expansion.
Here are the issues that are waking small business owners up at 3am: Annual GDP growth of 2% is not exactly ringing the cash registers; millions of unemployed Americans do not make very good customers; large companies are hoarding cash or buying back their stock instead of investing in growth; regulations have increased by 60% since 2005 (NFIB); looming Obamacare compliance costs will be unprecedented since 1913, when the 16th amendment created the income tax and gave the IRS something to do; and financial regs designed to rein in “Too Big To Fail” banks have made collateral damage of community banks and their ability to serve small businesses. Plus, all of that new Fed money is not making it out to the economy’s last mile. Whew!
Here’s the research I value: According to Bill Dunkelberg’s NFIB Index of Small Business Optimism, the gold standard for 40 years, small business sentiment has been at recession levels since November 2006. So while Wall Street parties, Main Street is in danger of having a Japan-like lost decade.
What’s wrong with this picture?
Write this on a rock...America needs businesses to increase profits from growth, not just efficiencies. Are you listening Washington ?
Jim Blasingame is one of the world's leading experts on small business and entrepreneurship. He is the creator and award-winning host of the nationally syndicated radio program, The Small Business Advocate® Show. In addition to his weekly columns, Jim is the author of two books; Small Business is like a Bunch of Bananas and Three Minutes to Success.