As the stock markets have performed poorly for two years, concern in the financial press has been focused on what the consumer will do. In reality, most of us lead a dual role, as business person and as consumer.
Gross Domestic Product (GDP) measures the total output of the U.S. economy. GDP is made up of about 70 percent consumer purchases, 13 percent business purchases and 17 percent government purchases. The current market cycle has been different in that it has been driven by a fall in capital spending (business spending), not in consumer spending. The least significant segment of GDP, business purchases, is the one that collapsed.
While consumer and government purchases grew over the past two years, business spending fell from 18 percent to 13 percent of the economy, a 28 percent drop. Our stock markets fell when the capital spending cycle went bust in early 2000.
Businesses quit buying servers and software from each other to link us all to the Internet. Telecom start-ups quit buying from the suppliers that provide hardware and software to provide the bandwidth, fiber and futuristic gear for the next big build-out in technology.
And when we reached 2000 and the world did not stop spinning, most businesses had already upgraded enough to allow them to forego purchases for two years. Capital spending on high-tech equipment went from growing at about a 12 percent annual rate from 1992 to 2000 to declining 15 percent in 2001.
Inventories fell to a six-year low as businesses lived off their stockpiles of goods before replenishment.
I am confident this cycle in the stock market is about to turn, based on the observation that business spending seems to have bottomed and the index of leading indicators, a government measure of future growth, has begun to rise. My opinion arises from the statistical evidence cited here, along with anecdotal evidence gathered from the business owners I advise.
As the spending in capital equipment increases, corporate earnings and outlooks will grow more optimistic and the economy and the stock markets will expand.
The key to the recovery of the coming market cycle is our behavior as consumers in the office, not at the mall. Look at your own business spending patterns and those of your buyers and suppliers. That data on capital spending will tell you when the stock markets will strengthen in this cycle.
Joseph Scarpo is chief executive officer of Bill Few Associates Inc. He can be reached at (724) 830-8800 or firstname.lastname@example.org.
Even though I'd read that I was more likely to die from a bee sting or a lightning bolt than from a shark attack, it was still difficult to go back into the water. The movie made such a lasting impression on me that it became hard to separate fact from fear.
Many investors are wondering if the relationship of Enron to the financial markets is similar to the hype surrounding shark attacks. Is Enron a rare event or are there more out there?
Let's review some facts about the stock markets.
The Wilshire 5000 Index is the broadest index for domestic publicly traded stock in America. The index, despite its name, is comprised of more than 7,000 stocks. Over the past year, out of all of those, I can think of only three large corporate bankruptcy filings: Enron, Global Crossing and Kmart.
I'm sure there were many small filings, but even those, based on junk bond default rates, have averaged only 3.7 percent over the past 20 years. As for large company bankruptcies, those with more than $10 billion in assets, I could find only 18 filings since 1980, fewer than one a year.
Most involved poorly managed businesses or businesses in declining industries. Only the smallest fraction involved outright fraud. Given the few publicly traded companies that experience business problems significant enough to require a bankruptcy filing, several comforting generalizations can be made.
Competent managers who play by the rules run the significant majority of American businesses. The rules, although complicated, seem to meet the needs of most stakeholders in the financial markets, yet a very small number will bend or break the rules.
Finally, if an investor stays diversified, with no more than 10 percent placed in any single investment, and owns a portfolio of quality investments, the likelihood of suffering significant financial damage is very low. If you have been concerned about investing since the Enron debacle, my advice is to get back into the financial markets.
Events like Enron are like shark attacks: Few people experience one compared to the number who are frightened by stories about them. Joseph Scarpo is chief executive officer of Bill Few Associates Inc. He can be reached at (724) 830-8800 or email@example.com.