After stocks took a plunge on Aug. 24 following economic troubles in China, the small business community wonders if market volatility can affect them.
Last Monday, China’s Shanghai Composite index dropped a whopping 8.5 percent in one day, causing a ripple effect around the globe. European and Asian markets dropped, and the U.S. S&P 500 index fell nearly 4 percent. While markets rebounded soon after the crash, should small business owners be worried?
In the short term, no, said Rohit Arora, CEO of Biz2Credit, on Inc. One bad day on Wall Street won’t mean that consumers will stop shopping, so business owners wouldn’t feel an immediate effect of a market crash.
The true impact of market volatility is actually psychological.
For example, when the stock market is up, people are happier and generally more bullish on the economy, so they’re willing to spend more money. “Their investments are worth more, and they feel like they have more money in their pockets and, importantly, more money saved in their retirement accounts,” Arora said.
On the other hand, a prolonged stock market slump would have negative effects on small biz. “When the stock market is up, cash is more free flowing for investment, and small business owners searching for capital are more likely to have an easier time finding it,” Arora said. When owners can’t find funding, it stifles economic growth.
The NFIB Small Business Economics Trends report in July showed a gain of 1.3 points to 95.4 in the small business optimism index. Read the monthly report on the second Tuesday of each month.
Small business owners are more likely to feel the market swings in their retirement savings accounts, CNBC reported. “No one is being wiped out unless they put all of their money into those [retirement] plans,” NFIB Chief Economist Bill Dunkelberg told CNBC. “It’s not the collapse we saw in 2008.”
Stock market volatility creates a bit of uncertainty for small business and fear of another economic slowdown, especially because the U.S. economy is still recovering so it’s more vulnerable to changes on a global scale.
“It will worry people if things continue to deteriorate,” Dunkelberg said. “The key is that people keep spending, so small businesses will continue to watch this and there will be some hand wringing.”