As the Earth takes another turn around the sun and a new presidential administration sets its priorities for the next four years, there are a number of financial considerations business owners should take into account.
The performance of the markets and the expected lending environment are top of mind for companies seeking growth.
According to the 2017 Economic & Stock Market Outlook from Milwaukee-based Robert W. Baird & Co. Inc., the stage has been set for improved economic trends and optimism in the coming year.
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In fact, even just the expectation of progress could increase CEO confidence and drive capital expenditures and corporate growth, said Willie Delwiche, investment strategist at Baird and an author of the report.
“For a long time, it’s been cheaper to hire more workers than to invest in a plant,” Delwiche said. “I think we’re reaching the point where that pendulum is starting to shift back. The good thing with that is that drives productivity growth and that helps the worker and that helps the business.”
The return of earnings growth could help ease valuation concerns for the cyclical bull market in stocks, which is in its infancy, the report says.
“I think the first half of the year, from a seasonal perspective, is shaping up to be better than the second half of the year,” Delwiche said. “I think the story really is going to be an economic one and if this hint of growth that we’ve gotten can continue into next year. We’ve emerged from four or five quarters of declines; we finally have earnings growing again.”
“I think a lot of the energy that has gone into the stock market here so far is the election of Mr. Trump and what he says he’s going to do,” said Bob Chernow, a Milwaukee businessman and futurist.
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“A lot of it is based on the future, not the current situation. My guess is that technically the market is ready to pull back here a little bit, maybe 5 percent. It’s gone up about 10 percent since the election.”
At the moment, Delwiche advises investors to hold slightly higher levels of cash than they would historically, since valuations are still high in stocks and interest rates are likely to move higher over the course of the year. Less bond exposure is also a good strategy, he said.
“From a global perspective, continue to focus on U.S. exposure rather than international exposure,” Delwiche said, since it takes currency issues out of play. “From a size perspective, small caps are doing better than large caps. Their upward growth potential is better. They do better when the economy is growing robustly.”
The Federal Reserve is expected to make as many as three rate hikes this year, which impacts not only valuations, but also the interest rates companies can expect to pay on loans.
“At the margin, it will cost a little bit more to borrow, but at the same time, the opportunities to put that money to work will be greater, the growth could be greater,” Delwiche said. “The economy will have the momentum, I think, to handle those high interest rates.”
Unless there are closely spaced interest rate increases, loan demand should remain healthy in 2017, said Jasin Pasho, Milwaukee market president at Wisconsin Bank & Trust.
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“With the increase that we’re seeing, they’re modest increases,” he said. “I don’t see it slowing down the loan application process, so much as the demand is there. So long as they are a sound business and they have a sound balance sheet and have good cash flow, I don’t think that will change, so long as it’s not that rapid increase.”
If President Donald Trump goes forward with his plans to reduce banking regulations, it should increase loan availability, Pasho said.
“Banks would have even more availability to lend more, so businesses would have, I would say, more selection of who to go to and how to expand, but their businesses would really rely on more internal growth,” he said. “If we don’t have as many regulations, if we don’t have as many compliance things, we could actually be investing those funds into loans for smaller businesses.”
Chernow said the banks are right that there’s overkill in the level of paperwork required to complete a loan, but he warned reducing regulations too far could swing the pendulum back in the direction that resulted in the financial crisis.
“The banks have a big problem right now – they’ve got a lot of money that they’ve got to put out and make money on,” he said. “The agencies which regulate banks and financial institutions will be starved by the federal government and will not be able to do a proper job of following up to make sure that people are doing what they say they’re going to do.”