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Your Investments and the Mass Extinction of Small Businesses

Jun 06, 2020 | Joseph Sherman |

Your Investments and the Mass Extinction of Small Businesses

When you have a retirement account that is invested in the markets, you may take comfort in your holdings of Fortune 500 companies, especially tech stocks. Are Google, Facebook, Amazon, and Apple immune to the pandemic’s financial devastation?

The impact of the pandemic on Americans and our economy is significant, and we surely haven’t seen the end of it yet. The unemployment at 38.6 million since March is the highest in almost a century, and data shows that almost half of US households are impacted by unemployment or reduced employment.

What is being covered less in the media is the impact the pandemic is having on small businesses, who play a fundamental role in US economics. Around 85% have been impacted, says a survey of over 300,000 small businesses by Alignable, and 75% of small and medium-sized businesses (I’ll use the common short term “SMBs”) have sought help from the government’s Payroll Protection Program.

SMBs have only a few months of cash

SMBs employ almost half of working Americans and create two-thirds of net new jobs. They are also leading US innovation and competitiveness. In other words, SMBs are vital to the US economy.

This brings us to the problems SMBs, and thus our economy, are facing. According to data from major banks, two-thirds of SMBs only have enough cash reserves to last them a few months. The risk of these businesses permanently shutting down is imminent.

In a forecast released earlier this week, Moody’s Analytics says that small businesses with just a few employees are expected to fail en masse. “Of the 8 million business establishments operating prior to the crisis in the US,” Moody’s continues, “it would not be surprising if close to a million do not make it. New businesses will eventually form, and the economy will recover, but that process will take years, not months.”

Larger businesses are better connected to banks, allowing them to more easily access federal aid and loans; small businesses don’t have this advantage. In May, commercial bankruptcy filings jumped by 48% year over year, which is likely just a prequel to the devastation facing small businesses across the country.

We are a far way from getting back to “normal” conditions, which is even more evident now—the recent riots and looting of small businesses in several large cities around the country certainly aren’t helping the morale of small retail business owners.

Why SMBs matter to your portfolio

The survival of small businesses matters to their owners and employees, but it goes much further than that. It also matters to every stock, mutual fund, and bond holder. SMBs are the giant herds of zebras and antelopes that the big predators (Fortune 500 companies) rely on for survival. Here’s an example of Google and Facebook—two companies you never thought relied on small businesses. With respect to digital marketing, for example, SMBs spend billions every year, making up most of Google’s and Facebook’s advertising revenue. According to Intuit, SMBs’ annual marketing budgets exceed $100 billion, money that would be lost to these giant tech firms and the economy should the SMBs disappear. In your retirement accounts or brokerage accounts, you either hold Google and Facebook stocks directly or through mutual funds or index funds. What do you think this loss of revenue will do to the massive tech companies’ stock prices and ultimately to your portfolio?

This is not a recession; this is a breakdown. You’re seeing the same thing that happened in the 1930s. – Ray Dalio

We are now a few months from the start of the pandemic, and the economic picture taking shape is harsh. It’s a perfect storm: our leveraged, debt-ridden global economy is being hit by the historic shutdown of the global economy, and the ripple effects will take down companies, large and small, and topple the markets. Don’t think our Federal Reserve can indefinitely prop up the markets with printed money. That formula creates short-term market highs, not consumers that have disposable income and are spending. Just think about your current spending patterns; they have changed substantially. We spend less in the post-corona world.

If Ray Dalio comment about the 1930s will be proven correct, a historic market crash will happen. At a time like this, you want to hold a portion of your life savings outside of the crashing markets, in a store of wealth that you can tap into when you need to while letting it maintain its purchasing power and grow when you don’t use it. This is gold and silver. And this decade seems like the ”no-brainer” decade for investing in precious metals.

I wish you health and safety during these trying times.

Image of Gold Alliance CEO Joseph Sherman.

Joseph Sherman, CEO

Gold Alliance