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December 1st, 2008 | The New York Enterprise Report

Market Down, Chips In: How to Benefit from a Down Economy

We’ve recently seen the Dow Jones Industrial Average plunge 777.68 points in a single day, credit markets languish in a perpetual state of atrophy and home prices fall by the sharpest rates since 2000. At the center of this volatility, the U.S. government has pushed through a multibillion-dollar financial rescue package to aid the struggling U.S. banking sector. While this news may have you considering saving all your cash under your mattress, there’s never been a better time to invest in your business.

Contrary to every human instinct for self-preservation, a cold analysis of large-scale economic performance following downturns in the business cycle shows that just when the economy looks as if it is falling off the side of a cliff, the opportunity for growing your business is actually at its highest. Small business owners can get a huge leg up on their competition by recognizing the behavioral flaw that makes them risk less when things are cheap and risk more when things are expensive.

For a quick reality check, ask yourself this question: What has changed in your business in the past year that would make a move you considered last year less attractive, now that it is available for a 20% discount? If you could not afford a potential star employee or a posh new office space, or pull off a big acquisition, and now you can, why wait it out? An investment made today is expected to have a greater return than one made at the peak of the economy’s expansion. The opportunity is there and the iron is hot. Here are some questions business owners should be asking themselves as they prepare to expand:

Liquidity: Do you have enough cash on hand to survive a prolonged downturn and make aggressive strategic moves in the middle of it?

Retirement Funds: Do you match employee contributions into retirement accounts and/or 401(k)s? As you weigh the timing of contributions, realize that now — when stocks are cheap — is a good time to be making those contributions, rather than waiting until the market recovers.

Refinance: What kind of debt does your business hold? The federal funds rate just went down to historically low levels and, contrary to what’s being reported in the news media, banks are still lending to individuals and businesses with good credit. There could be real financial advantages to refinancing now at much lower rates.

The evidence is concrete. Both GDP and S&P 500 market performance historically have increased most in the one-year and five-year periods following downturns in the business cycle. In the one year following the worst business cycle downturns, GDP has grown at a rate of 9.58% on average and the S&P 500 has gained 20.91% on average. In the five years following these downturns, annualized GDP has grown at a rate of 7.69% and the S&P 500 has grown at a rate of 13.24%. These results dwarf those seen during the one-year and five-year periods following business cycle peaks. Like the stock market, the economy is cyclical. So how can you, as a business owner, go about taking advantage of this trend?

Hire more people. With unemployment numbers on the rise, you have an opportunity to recruit people you couldn’t get before.

Acquire a competitor. Think there aren’t any targets out there? Take a close look at competitors that are fearful, tired or didn’t enter the market as strong as you and are missing out on the rewards. This step could also give you a big boost of new talent.

Let your money work for you. Many business owners keep a cushion of corporate cash on hand at all times, but few ever analyze that cash relative to their business’s cash flow. Now is a great time to park longer-term cash in municipal bonds, which are safe and yield much more than a bank or money market account.

Sometimes the acceptance of a possibility that things may get worse before they get better is needed. But the payoff from a calculated risk taken during a market downturn can come back tenfold. Just recently, I put my own theory to work, accepting hundreds of résumés from workers laid off at the height of the Wall Street crisis. This chance to hire financial all-stars that I would not have had access to a year ago could act as the primary agent for growing my business. The same opportunities are there in all sectors. It’s time to stop wallowing and start thinking strategically about the opportunities presented by the current downturn in the business cycle.

By: Gregg S. Fisher

As Published On: The New York Enterprise Report

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Gerstein Fisher is a division of People’s United Advisors, Inc., a registered investment advisor and a wholly-owned subsidiary of People’s United Bank, N.A.

 
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