Large corporations continue to find ways to reduce overhead and sell enough to each other, distributors, and retail companies in order to raise earnings. This is great for stock investors and does a lot for those employed by them. At the same time we see that economic numbers in the real society which includes small business owners and employees continue to wane.
Housing is still sliding since many can’t borrow, charity accounts continue to receive smaller gifts, employment is lagging and falling behind corporate earnings, people are still finding ways to reduce spending, and overall the numbers leading into next year just don’t look good. And we haven’t even seen the effect of higher taxes yet! What will that be like?
The disconnect is really an important concept to understand because without understanding this, it’s easy for a business owner or investor to look at corporations as the lead indicator of whether to expand business and invest at higher risk levels. The news media would have everyone believe that Citigroup’s earnings and the earnings of other companies mean the economy is getting better. It just does not work like that. If you own the stock of a company and it goes up on positive earnings news, then your economic outlook may be better, but this does not mean others who own no shares are doing better.
So which is it? Is the country seeing a better economy in the very near future or not? Ask around, talk to friends who own a business, ask family about their jobs, and you can get a better idea of what is really going on out there.
How do we overcome the duality of trends? Invest in large corporations if you can, the better ones of course, and expand your business into areas which have been showing stable or growing demand. Keep a cautious mindset and don’t let generalities like blue chip earnings numbers lead you into an overly optimistic strategy that could cost you more than you expect. Down the road a few years, when we wise up a bit and let business owner/entrepreneurs do their thing which makes this country great, we will be able to afford optimism and the risk involved.
I’m not saying “Don’t invest, don’t expand business”, but on the contrary, I believe this is one of the best times to do so, but you better be extremely cautious!