THE GOOD NEWS OF BAD NEWS

Many have asked me why the stock market is doing relatively well, while the economic numbers keep getting worse. There are several reasons for this phenomenon so let’s review a couple things that are going on.
 
High unemployment. The unemployment numbers are off the charts, which would normally indicate tough times ahead.  However, consider this issue from an investors’ point of view. In conversations with various business owners I am hearing that many companies are having a difficult time retaining employees because in many cases, the CARE act offers more in unemployment benefits than an individual was earning when they were working. When government gives incentives to not work, they artificially inflate the unemployment numbers. At the present this incentive only lasts 16 weeks. Since Wall Street investors are usually looking further than that into the future, much of this unemployment number has been discounted in their evaluations.
 
The second aspect of growing unemployment is more ominous for employees but potentially good news for investors. One of the biggest costs of running most businesses is labor, which can reach 50-70% of operating expenses. I had a good conversation this week with the owner of a large accounting firm and was surprised to learn that many of their clients, especially restaurants, have actually increased profits, (on lower revenue) because they have been doing curbside pickup only. If you spend $100 in a restaurant dining room, you will take up space and require service individuals such as waiters, bussers, hosts etc., to care for you. If you order online and pick up your meal you will still pay $100 but have eliminated most of the employees. You have also increased the number of meals that can be sold, with the establishment no longer limited by room size.
 
I expect that just about every business manager in America is using this crisis to ask themselves, “How can we operate with fewer employees?” This kind of thinking tends to lead to greater innovation, higher efficiency and ultimately more profits. It’s good news for investors but not so great for employees.
 
Another reason the “market” is doing well compared to the news is because of what actually makes up the stock market. Wall Street does not trade in small businesses. Even a small cap company generally has a minimum value of about $300 million. Investors are betting that even if there are massive business failures, the large Wall Street companies are more likely to survive, and even benefit as they pick up extra market share from the weaker ones that fail.
 
These are a couple of the reasons why Wall Street investors seem a bit disconnected from the pain on Main Street at this time. If you are an investor, these realities are valuable to know and consider. Look for companies that can reduce staff, and look for innovative firms that will help them to do so. And if you are an employee, use this time to improve your skills and increase your value to an employer.