The End of Small Business?

The economic crisis which has been brought about by the coronavirus has had a devastating effect on small business. Anyone that has ever owned or operated a small business knows how difficult it is just to stay in business during normal times. Now businesses have been ordered to close their doors for an indefinite period of time. Many businesses have already shut their doors permanently (For an example of this, see the picture in the Charts for Review and Thought below. Eight weeks ago, this shopping center was completely leased up. Now the only two businesses that are left are the pizza establishment and the coffeehouse. The rest have closed their doors permanently).

When businesses are allowed to open up again, will they be able to? Will they want to? For many businesses, opening up after a prolonged period of being closed will essentially be like starting all over again. That means hoping that old customers will come back and having to find new customers; and all of the other things that go along with starting a new business. Will their employees want to or be willing to come back? There are so many uncertainties. On top of this, the failure rate for new businesses in normal times is in excess of 90%. And now they will be starting over again in a recessionary economy or an economy that will quite possibly be in a depression.

Small businesses are the backbone of the economy. Collectively, they are the largest employer in the economy. It is essential for the sake of the economy that they come back, and come back strong, when they are allowed to reopen. Will they be able to do this? At this point in time, we simply don’t know. While the coronavirus has not spelled the end of small business, it certainly will be a challenge for small businesses and the economy to recover for some time to come.

Economic and Investment Highlights

Last Week

Marriott and other hotel owners are furloughing thousands of workers and slashing staff headcounts.

The restructuring of $35 billion of debt for Puerto Rico has been paused.

The Marine Corps is shifting its focus from fighting insurgents in the Middle East to making preparations in the Pacific, especially in regards to China.

The Trump Administration and Democratic lawmakers are calling for corporations not to use aid extended to them for stock buybacks.

The Fed signaled it would do practically anything to help the economy. This includes extending loans to large and small businesses and buying unlimited amounts of government debt.

Softbank said it plans to sell billions of dollars in assets to support its stock price and strengthen its balance sheet. Separately, WeWork directors are gearing up to fight Softbank’s pulling back from its backing of the troubled office provider firm.

Boeing and GE plan to scale back operations and lay off workers. Many other large companies are doing the same.

Amazon, CVS, and Walmart, and a few dozen other firms, plan to hire additional workers.

Major airlines are preparing for a voluntary or mandatory cessation of nearly all passenger flights in the U.S.

The Tokyo 2020 Olympics have been postponed until 2021.

The coronavirus is hampering Russia’s plans to increase oil production in its price war with Saudi Arabia.

A record 3.28 million workers applied for unemployment benefits last week, marking the end of an historically strong job market with unemployment the lowest it had been since the 1960s. In February, unemployment was 3.5%.

The G-20 countries said they would spend more than $5 trillion dollars to help bolster the global economy.

The U.S. became the country with the largest number of confirmed coronavirus cases.

China will close its borders to help combat the coronavirus.

The House approved, and Trump signed, a $2 trillion stimulus package.

U.K. Prime Minister Boris Johnson has tested positive for the coronavirus, the first leader of a major country to do so.

Using a presidential wartime power, Trump ordered GM to ramp up production of ventilators to treat coronavirus patients.

Trump extended the social-distancing guidelines to the end of April.

The Dow, the S&P 500, and the Nasdaq all rose for the week. The Dow was up 12.8%; the S&P 500 was up 10.26%; and the Nasdaq was up 9.1%. The 10-year treasury yield ended the week at 0.744%. Gold closed at $1,623.90 for the week. Oil closed at $21.51 for the week.

The Week Ahead

This link takes you to Econoday’s Economic Calendar and Economic Events and Analysis which shows the upcoming economic reporting events scheduled in the week and months ahead.


Note: The models below may not capture the impact of COVID-19 beyond their impact on GDP source data and relevant economic reports that have already been released. They may not anticipate the impact of COVID-19 on forthcoming economic reports beyond the standard internal dynamics of the models.

Note: The comments that follow are derived from the economic indicators referenced in the Resources section of this newsletter and other sources in this report.

The Aruoba-Diebold-Scotti Business Conditions Index (ALS) had been trending up for several weeks from having dipped in 2019. The week before last, the index crashed. This is an extremely negative indicator for the economy on a short-term basis.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2020 is 3.1 percent. This reading continues to support the ALS model assessment of an improving short-term economic environment.

The New York Fed Staff Nowcast stands at 1.7% for 2020:Q1 and 0.3% for 2020:Q2.

The Chicago Fed National Activity Index (CFNAI) showed an increase in economic activity in February. The Chicago Fed National Activity Index (CFNAI) was +0.16 in February, up from -0.33 in January.

All told, these short-term economic indicators are a neutral to negative analysis for the economy, at least on a short-term basis.

Expectations that stock prices will rise over the next six months is now at 29.7% in a recent AAII Sentiment Survey. The historical average is 38.0% for the survey. 19.0% of the investors in the survey described their short-term outlook as neutral and 51.3% were bearish. Please see the AAII Sentiment Survey for the complete results.

The latest Gross output (GO) reading suggests moderate economic growth as we enter 2020.

On a longer-term basis, the forecasters in the Philadelphia Fed’s Survey of Professional Forecasters (as of February 14, 2019) predict real GDP will grow at an annual rate of 1.7 percent for the first quarter of 2020, 2.1 percent for the second quarter of 2020, 2.0 percent in the third quarter of 2020, 2.1 percent in the fourth quarter of 2020, and 2.2 percent in the first quarter of 2021. On an annual-average over annual-average basis, the forecasters predict real GDP to grow 2.0 percent in 2020, 2.0 percent in 2021, 2.0 percent in 2022 and 2.0 percent in 2023. The forecasters predict the unemployment rate will average 3.6 percent in 2020, 3.6 percent in 2021, 3.7 percent in 2022, and 3.9 percent in 2023.

For a more in-depth review and analysis of the economy, please see our mini-book on economic analysis and forecasting entitled: Simple and Effective Economic Forecasting.

Stock Market Valuations

Our estimates of the market valuations for two stock market indices, the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500), can be found in the file below:


During this time of global flux due to the coronavirus, I am leaving the Conclusion discussion below the same as last week. Last week’s discussion still adequately reflects my thinking on the current state of affairs.

Reprinted from March 23, 2020

Up until the past week, the economy had been in a stable but somewhat vulnerable state. Nonetheless, it had remained fairly strong. In fact, robust consumer spending and strong labor market conditions had given us confidence that the economy, which had been in its tenth year of expansion, could continue to grow. But we were cautious on this outlook. There were several reasons for our caution. U.S. business growth had been mixed. And global economic growth had been mixed as well. The new coronavirus was becoming a global economic threat, although it was still too early to tell how much of an effect it would ultimately have. Debt is at high levels for consumers, businesses, and government (at all levels of government). Finally, this is an election year that will likely have significant consequences either positively or negatively depending on the outcome of the elections. And of course, it is still too early to tell what the outcome of the elections will be.

In just a few days, the coronavirus’s effect on the economy and the markets went from a ripple to a tsunami. Businesses are shuttering, events are being cancelled or postponed, grocery store shelves are empty, and people are being asked or ordered to stay home. The markets are now deep in bear market territory. The effects on the economy, even given the short time that the economy has been retreating, may be with us for a long time. There is now a much greater risk of a recession, and there has even been some talk of a depression. The government, the Fed, Republicans, and Democrats, and pretty much the entire country, is trying to get the virus under control and is coming up with plans to mitigate the long-term economic effects caused by the virus. But the virus has impacted the economy – in a significant way – in just a short time. How long lasting the effects will be no one can tell right now. The economy has been largely shut down and remains so today. It takes time to restart the economy after a situation such as what is occurring at the present time.

Given these events and the rapidly deteriorating situation, as I said last week, I would caution not to panic. The economy and the markets will get better. The situation is bad – there is no doubt about that – but it will turn around. The real question is when will it turn around? No one knows that at the present time. But it will turn around.

For now, review your investment portfolios. It is highly likely that all or most of your stocks are down. You should not consider selling the bulk of your stocks – only consider selling companies that are not sound companies. But do recognize that as the economy deteriorates, even good companies will be affected.

For stock market value hunters, we believe it is still too early to jump back in. We will be closely monitoring the markets using the many tools and models that we have developed over the years to assess the economy and the markets. We will use our best judgement and thoughts to let you know when we believe things are turning around. The turnaround hasn’t happened yet.

We believe it is important to maintain a long-term view toward investing. But for now, just sit tight. Eventually, this means that you should continue building your investment portfolio using the Cassandra Stock Selection Model to select individual securities that offer growth and value opportunities.

Chart for Review and Thought

A Nearly Empty Shopping Center

Simple and Effective Economic Forecasting Model

Note: The table and chart below have not been updated. However, we believe that a recession is quite likely. In the chart below, the bottom green line shows what a recession could look like.

Notes (GDP Growth Chart):

  1. See the July 8, 2019 Commentary for an introduction to this model.
  2. Actual numbers 2007 through 2019; forecasted numbers thereafter.
  3. Normal GDP growth is typically in the 2% to 3% range.
  4. A recession is generally defined as two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).

Thought for the Week

“With the national hoarding of toilet paper, it appears that Charmin Ultra Soft may be replacing the dollar as the United States official currency.” ~ Anonymous


Dr. Wendee spoke at the Investment Club of America’s annual economic summit, called Econosummit, on Sunday March 1, 2020 in Las Vegas.

Dr. Wendee attended the The National Due Diligence Alliance (TNDDA) investment banking conference, which was held March 6-8, 2020 at the Four Seasons Resort in Dallas, Texas. This is a conference held several times throughout the year for investment bankers and registered investment advisers to learn about new opportunities in the Alternative Investment asset classes.

TNDDA Meeting in Dallas, Texas

We have been researching the use of crowdsourcing for investment ideas. We will be sending a survey out in the next few weeks to get your input on the economy and the markets; and to get any investment ideas that you would like to share. We will compile this input and distribute the results to you and our other subscribers. We have been testing our crowdsourcing models with students and have been having good success and results.

Dr. Wendee has been researching and writing a new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics). The full paper on Intrinsinomics will be published in the near future.

Finance 3350: Personal Finance-Portfolio & Risk Management– Dr. Wendee started teaching Finance 3350 – Portfolio & Risk Management at California State University, Los Angeles (CSULA) starting January 2020. Dr. Wendee teaches courses in Management and Finance at CSULA.

Business 4970:Strategic Management – Dr. Wendee started teaching  Business 4970:Strategic Management  at California State University, Los Angeles (CSULA) starting January 2020. Dr. Wendee teaches courses in Management and Finance at CSULA.

Business 218 – Macroeconomics – Dr. Wendee started teaching Business 218 – Macroeconomics at California Baptist University (CBU) starting January 2020. Dr. Wendee teaches courses in Finance and Economics at CBU.

Dr. Wendee presented a paper on his new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics), at the International Leadership Association’s annual global conference which was held in Ottawa, Canada last Fall.

Dr. Wendee is working on a financial planning modeling program which will be available in the near future. The modeling program is designed to assist anyone in creating a financial plan and is customizable for each person’s unique financial planning goals. A working draft of the model is currently in beta test with students.

Intrinsic Value Wealth Creation pyramid

We always conclude our commentary with a discussion of the Intrinsic Value Wealth Creation Pyramid. The Intrinsic Value Wealth Creation Pyramid is designed to show some of the major categories for building wealth. It is the result of many years of study of the wealth building process; experience working with clients who have built considerable wealth; and my own personal experience building wealth. Newsletter subscribers should consult the Intrinsic Value Wealth Creation Pyramid as one of many useful investment tools while considering their investment plans.

The chart in this section is an expanded version of the Intrinsic Value Wealth Creation Pyramid Chart referenced in the Forbes.com article entitled, Nine Of The Best Ways To Build Wealth.


See our Resources section for links to economic and other resources used in the preparation of this Commentary.

This entry was posted in Economic & Business Chart Room, Economic Outlook, Entrepreneurship, Focus List, Investment Recommendations, Investments, Notes From The Field, Special Situations, Uncategorized, VDI/REEP, Visionary Ideas and tagged , , , , , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.