Market Disruptions & Implications for Investors and Business Owners

Since joining the faculty at the Robins School of Business, University of Richmond we've seen significant market developments. Here's the snapshot of the economic trend lines, impact on a range of asset classes, how we're advising clients to mitigate risk, and what it means for closely held firms.

Ukraine, inflation, and the market responses to the tightening monetary policy...

It’s worth laying out some of the key dynamics. The fourth quarter of 2021 saw GDP growth (a measure of economic output) at 6.9% annualized (Financial Times ). The Atlanta Fed provides a real-time estimate of Real GDP growth, and adjusted for inflation has "hit a wall" at 1.3% (Federal Reserve ). This significant domestic slowdown has happened within this context:

Key Trends

·????????Conflict in the Donbas. Russian Federation troops have reportedly entered into skirmishes, with two Ukrainian soldiers dead (Reuters ). Ukraine is of critical value to Russia in terms of historic ties, food production, and one of four military strategic access points to their west.?The risk of Europe’s largest war since WWII and catastrophic loss of life looms. It is set to exacerbate already increasing energy prices (Moodys ).

·?????U.S. Inflation?hit 7.5% in January, the fastest rate since 1982 (Bureau of Labor Statistics ) – eroding the purchasing power of retirees’ savings. In Europe it hit 5.1% (CNBC ), and 5.4% in the UK (Wall St. Journal ). “Power prices quadrupled, gas prices tripled and oil prices almost doubled in 2021” (Seeking Alpha ).

·????????Labor Force Participation?in January was 62.2% (Bureau of Labor Statistics ), strengthening since the COVID trough of 60.2% in April, 2020. Despite strong wage growth, the broader trend is the so called “great resignation,” which has varied by sector, with thousands having left their positions and not returning (Wall St Journal ).

·????????Debt to GDP?levels have expanded since the end of the pandemic.?Total Public & Private Debt-to-GDP has reached 327%. Since Q2 2020 household debt to GDP has actually fallen (Federal Reserve ). The primary driver is federal government debt which now exceeds 100% of GDP. (Seeking Alpha ). The dynamic raises important questions about trigger points for the next deleveraging, particularly in non-financial firms, and public sector budgets under pressure from increasing costs to service existing debt.

Asset Prices

·????????Commodities?prices have risen on COVID supply chain disruptions, related inflationary pressure, and the Russian expansionary efforts threaten to further disrupt supply. Armed conflict will further stress the system in proportion to defense-based demand. Last week the HIS index of materials prices increased 4.5%, capping a six consecutive week period of increases – up 19.3% (IHS ) At $91/barrel, oil is up 40% since Dec. 1st?and nearing 7-year highs (Reuters ). Expect further increases, as commodities are used as a defensive hedge against further inflation.

·????????Yield Curve?has been flattening. The Fed’s tightening of monetary policy – raising the Fed Funds Rate and "aggressively" winding down its bond purchasing in response to inflation. Long-term neutral rate is estimated at 2.5%. Short-term government bond yields between 3 months, and 5 years (high of 1.96% on 2/10) have been rising (CNBC ?&?Bloomberg ); making long-term bonds less attractive and signaling a further slowdown in growth. An inversion would signal a forthcoming recession (Forbes ), and the risk of wide-spread stagflation is worth noting.

·????????Equities. The main benchmarks are down for the year. Year-to-date: DJIA is?-6.85%, Wilshire 5000?-6.13%, S&P 500?-9.33%, and the Nasdaq Composite down?-14.43%. From the December note, you’ll recall the reference to?Shiller PE Ratio ?(a market-wide measure of share price to the underpinning earnings), which then showed a pricing bubble. The ratio sits at 35.59, still over twice the historic mean of 16.92. We could easily see another 12 - 15% correction.

For Closely Held Firms

The risk-off environment necessitates owners' responses to a COVID-endemic environment, related behavioral?shifts in work and consumption patterns, market capacity to raise prices, the extent of resultant margin compression, industry-specific adaptations to an aging demographic, risk around new supply chain disruptions (notably in energy markets),?staffing challenges, and retirement planning for families and employees:

·????????Product & Service Pricing.?As materials and costs of labor increase, entrepreneurs are increasingly assessing their prices relative to the competition. Avoiding margin compression is primarily a function of rapid adjustments to changes in market conditions, and may vary considerably across geographies. Project-based price estimates are increasingly including time limits, and those considering new projects will factor in rising costs of capital.?

·????????Staffing. Recruitment and selection efforts will be particularly difficult, notwithstanding regional “sunbelt” markets with stronger labor supply. It has been particularly difficult to fill positions in both travel & entertainment, as well as for related ground transportation drivers. Recruiting for lab technicians, couriers, and warehousing has been markedly easier. Responses to employment openings will include raising compensation levels, to the extent profits on new/marginal work allow.

·????????Fuel & Materials. Commodity price increases, as described, will increase variable costs and raise break even points most significantly in?construction, transportation, and domestic manufacturing. The prospect of war in Europe could result in either sharp increase in oil and natural?gas, a protracted period of broad increases in the cost of raw materials, or both. Strategies to offset cost increases will include hedges against rising costs of inputs.

·????????Cost of Borrowing. Increasing interest rates are also affecting cost levels, as debt service for capital intensive sectors, as well as for government at all levels, is rising. Installment loans, lines of credit, credit cards, auto loans and receivables-factoring are increasing. Those at a household level who have fixed-rate mortgages will fare better. The firms most reliant on structural debt to finance operations, will be most affected. Savvy firms will seek to lock in longer terms, at today’s rates wherever possible and particularly on collateralized loans (those secured by hard assets).

Democratizing Business Ownership

·????????Open Trellis.?Work continues on our new software product to assist small business owners exchange advice, and we’re extending our online presence - launching related email and social media campaigns.

·????????Credit Builder?(with Capital One) is going well, and with our pilot underway, we're laying the groundwork for a new technology to catalyze small business lending which addresses disparities for those who have had limited Capital Access.

·????????The?Business Clinic?at University of Richmond has been very successful. Students provide RVA Works entrepreneurs with pro bono assistance in strategic planning, digital marketing and project management; while they gain practical experience and grow in their social awareness. Feedback has been extremely positive.

·????????RVA Works Accelerator?is now in its 8th?year, and we’ve passed the 100 student mark – teaching core business skills to help democratize business ownership, and help people overcome barriers (please see the statistics below).

·?????Related research?continues: Machine Learning optimization of loan portfolios to enhance capital access (University of Liverpool),?Measuring accelerator results through Social Impact Assessments (University of Virginia), Measuring the value of entrepreneurial thinking for accelerator graduates (Virginia Commonwealth University), and Community engaged research to examine racial equity in the Richmond region (Kauffman Foundation and Virginia Commonwealth University).

If you have any questions about my investment work as an Independent Advisor Representative (IAR), teaching entrepreneurship and innovation at the University of Richmond, or leading RVA Works - Please don’t hesitate to contact me.

Warm regards,?Dale?

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P.S.?Since 2014, our team of co-founders have?delivered on our mission to help more people build good livelihoods, and overcome structural barriers to business ownership:

+ $300,000 Raised

+ 91%, Contribute 91% to direct program expenses

+ 2500 Estimated hours of volunteer service

+ 6500 Members of our online audience

+ 333 Free, public meetups for business owners

+ 104 Startup founders in our accelerator

+ 97% women-owned or ethnic minority-owned

+ 65% from lower-income households

+ 100% of founders-in-need receive tuition support

+ 38%, Accelerator alumni report an average increase of 38% in household income