Here’s a breakdown of the big issues driving global markets and what you need to know as a small business owner.
If you read or watch the news, you’ve likely noticed several financial stories dominating the headlines. Ongoing stories about interest rates (will they rise or won’t they?), trade wars (are we in one and with whom?), and commodity prices (will raw material prices keep fluctuating?) all command the attention of the financial media. These big financial trends are undoubtedly important, but not all of them will affect your day-to-day business operations.
Here, we’ll break down what you need to know about the big issues driving global markets today and whether or not you need to worry about them, depending on your line of business.
Interest Rates
The big picture:
Since 2015, the Federal Reserve has raised rates nine times, with four rate hikes in 2018. However, it’s hard to forecast if and when the Fed will raise rates again. At the beginning of 2019, investors were almost certain that the Fed would put another hike in place, but Chairman Jerome Powell signaled a pause in rate increases. That could change at any time, though, based on economic signals. This has led to speculation around whether the federal funds rate target will increase beyond 2.25-2.5 percent.
Rate changes have vast implications for the economy at large, as rising rates can affect inflation, bond markets, consumer spending, and lending. Let’s take a look at whether rising interest rates might affect your business.
You need to pay attention if:
Businesses financed with variable rate loans could be affected by changes in interest rates. If the Fed raises rates, you are likely to see interest rates on your loans rise in tandem. However, there is a silver lining: If you frequently borrow to maintain your cash flow, rising interest rates incentivize lenders to offer more loans. As a result, you may have more options at your disposal to keep your cash flow healthy. Just remember that you’re borrowing at a higher rate, which you’ll have to pay back in the future.
If your business is primarily consumer driven, rising interest rates could lead to a dip in sales. For big purchases, such as cars and houses, rising interest rates can make consumers less willing to take on higher-interest loans to finance these purchases. Additionally, higher rates may lead to consumers having less cash on hand, which can make them less willing to spend on smaller purchases.
If you are planning on hiring more employees or investing in large equipment purchases for your business, this could be more difficult when rates rise. When it’s costlier to borrow, businesses tend to cut back on these expenses.
Don’t worry if:
If your small business loans are fixed, if your business isn’t consumer driven, or if you weren’t planning on a hiring spree or upgrading equipment, it’s less likely that your business will be impacted by interest rate increases.
International Unease
The big picture:
President Donald Trump has changed a number of American trade deals since his inauguration in 2017. He pulled out of the Trans-Pacific Partnership, pledged to renegotiate the North American Free Trade Agreement (NAFTA), and instituted tariffs on goods imported from China, notably aluminum. At the same time, big unknowns remain around U.S. trade deals with Europe, specifically how Britain’s withdrawal from the European Union (Brexit) may affect trade.
In the U.S. domestically, the Trump administration has also taken steps to limit visas to foreigners, including many skilled workers in the technology sector. Enforcement agencies have also been tasked with taking a tougher stance on illegal immigrants, even those who have been in the country for many years.
But do you need to worry about these shifts in policy?
You need to pay attention if:
If your business involves foreign trade — or depends on suppliers who do — this issue could affect you. China has responded to U.S. tariffs on Chinese goods by instituting its own tariffs on U.S. exports, namely food, beverages, and vehicles. If you operate in these industries, you may be affected. Similarly, if your business involves trade with Canada, Mexico, or the EU, you’ll want to keep an eye on trade negotiations with relevant countries.
U.S. Immigration and Customs Enforcement data shows deportations under the Trump administration (256,000 in 2018) remain similar to those under former president Barack Obama (240,255 in 2016 and 409,849 in 2012). Despite increased publicity, day-to-day changes here are unlikely to affect your business if they haven’t previously.
However, if your business sponsors visas for foreign employees, you may be affected. For instance, the State Department has changed its policy on sponsoring same-sex partners of diplomats unless the partners marry officially. Changes like this in the diplomatic sphere could potentially affect private sector visas and are worth monitoring.
Don’t worry if:
If you don’t do a lot of foreign business, don’t depend on suppliers who do, or don’t rely on an immigrant workforce, this may not have a big impact on your operations. While the impacts of trade tensions are wide-ranging, the impact on your business will likely be indirect.
Keep in mind:
Trade and immigration are heated and highly politicized topics, and many headlines are based on proposals or theories, not actual law. Your best strategy is to look at existing laws and try to avoid making any big decisions based on speculation, while always considering a backup plan in case speculation becomes reality.
Commodity prices
The big picture
Uncertainty around trade and the government has affected raw material prices. For example, changes in trade policies between the U.S. and China have led to swings in the price of steel, aluminum, soy, corn, and much more. Added to that, renewed tensions with oil-producing countries, including sanctions on Iran and diplomatic issues with Venezuela, mean energy prices are more volatile.
Trends in commodity prices can seem far removed from the day-to-day operations of your business. So what’s important here, and what do you need to know moving forward?
You need to pay attention if:
Think about the materials required to do business. If you rely on raw materials for production, or even if you spend a significant amount of money on gas for transportation, deliveries, and shipments, fluctuating material prices could impact your bottom line. Once you’ve figured out what materials your business may be sensitive to, investigate what has been affecting their price.
Metals and agricultural commodities have been the primary targets of tariffs, and as a result these materials have seen their prices rise or fall depending on government actions. For example, the auto industry is dealing with fluctuating steel costs due to Chinese trade negotiations and tariffs, leading to an increase in material costs, a decrease in exports, and decreased overall sales. Similarly, food producers have had to scramble to find new suppliers in order to avoid taking a hit from tariffs.
Don’t worry if:
If you’ve done an analysis to see how material costs might affect your business and determined that they’re only a small part of your budget, you shouldn’t worry too much about commodity prices. Similarly, if you don’t rely heavily on shipping your goods overseas or across borders, you probably won’t feel the impact.
Keep in mind:
If your business does depend directly on commodities, you might consider whether you can protect yourself by buying commodities futures to hedge against fluctuating raw materials costs. Although, you could still see losses if commodity prices go down. Also, remember that when it comes to commodities, it’s smart to follow the same advice that applies to trade negotiations: Make your decisions based on actual events rather than on speculation about what might — or might not — happen in the future.
Interest rates, trade tensions, and commodity prices are likely to remain a source of uncertainty in the near future. It’s important to base your business decisions on facts rather than speculation, and remember not to overreact to new developments.
Now that you know how to evaluate trends that could affect your bottom line, read more about protecting your business from another threat: cyberattacks.
Commodity related products carry a high level of risk and are not suitable for all investors, Commodity related products may be extremely volatile, illiquid, and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Investment involves risk, including loss of principal.
