Reading the financial news every day can be exhausting, confusing, frightening, or all the above. Making sense of the noise is even more challenging for a CEO. What does it mean to your business?
We read about rising interest rates – that is a broad characterization. The Federal Reserve controls the Federal Funds rate, which put simply is the rate banks charge each other as money moves in the economy. Mortgage rates and treasury rates will follow the federal funds rate directionally, but not in lockstep.
Why It Matters
Rising interest rates hit the American consumer, and this is a consumer driven economy. We have already seen how rising interest rates have hit the housing market hard. It also affects credit card rates, car loans, which can reduce purchasing power when inflation on other goods is already extremely high. How is your customer doing and what is the impact on them?
Your own borrowing will be significantly more costly. For companies with tight margins that rely on lines of credit, cash flow will take a greater hit as these loans are floating rate. Capital intensive businesses will also feel an impact as any new debt added for assets will be more expensive. Do you have cushion to manage this? How are you managing cash flow right now?
M&A activity is being impacted, especially with smaller buyers and some private equity transactions where higher debt costs are leading to lower purchase prices to make the economics of the transaction work. If a sale of your business is on the radar, does this affect your potential buyer?
The Financial Markets
The Dow Jones, S&P 500, bond markets and most asset classes have been on a roller coaster. The markets can be both reactive (knee jerk responses to key headlines such as the most recent higher than expected inflation reports) and predictive (already pricing in sizeable interest rate increases, which will affect corporate earnings, and lower equity valuations).
Why It Matters
The financial markets have a large impact on American confidence. I know one CEO who follows bitcoin incredibly closely and it has a huge impact on his perspective of the environment. Now bitcoin is far more mainstream today, but still a very volatile asset. Perspective and context are key. The markets are constantly moving. What is critical is why the markets are moving. And does that provide any insights for your business. For example, if they are declining because big retailers like Walmart and Amazon are seeing softening demand and rising inventories, that information can help you make your next move. The performance of industry sectors can also provide very helpful information. How are public companies in your space performing? What actions are they taking and what does that tell you?
This could also impact M&A activity, more so for larger strategic buyers if their own stock price is depressed. Large strategics utilize equity capital for growth and often use stock in acquisitions themselves. Multiple strategic buyers that were very aggressive in acquiring in recent years have now shifted to buckling down to prepare for a recession. If your buyer is likely a large strategic, what does this mean for you?
We constantly talk about the numbers behind the numbers. What happens on Wall Street affects Main Street. You should be watching interest rates, the markets, and broad economic trends. Just be sure to go one to two steps further to really understand their impact on your customers, your vendors, and your business.