Will the music ever end? That’s the question on every financial analyst, hedge fund manager, policy maker, and day trader’s mind. Any freshman economics student will tell you that the market goes through booms and busts. And yet, the stock market has essentially been riding high since the bottom dropped in 2009.
At the end of business on March 6th 2009, the Dow Jones closed at 6,547.05 – its lowest point since 1997. On the last day of trading in 2019, the Dow stood at a whopping 28,538.44! In that same time period, the S&P 500 more than tripled while the NASDAQ 100 more than quadrupled its value. In the wake of the Great Recession, what has fueled the longest economic expansion in American history and what does it mean for the new decade?
2019 began with investors wary of an economic slowdown. After all, the impact of Brexit, trade talks with China, and historical precedent still weighed heavily on the global consciousness.
Many experts including president of InvesTech Research, James Stack, predicted 2019 would be a bear market, a term that refers to securities declining by more than 20% due to an overall pessimism in the market. According to a study published by CNBC, bear markets tend to precede recessions by an average of eight months. While some investors limited their exposure to stocks in 2019, the market flourished. Why were so many investors wrong?
The Federal Reserve Lowered Interest Rates
The Federal Reserve utilizes a few tools to control the economy. The Fed engages in the buying and selling of Treasury bonds known as open market operations. When the Fed buys bonds, the money supply increases and interest rates decrease as prices increase. When the Fed sells bonds, prices decrease and interest rates increase. The Fed can also manipulate interest rates (the price of borrowing money), this rate is known as the Fed Funds Rate.
In 2019, the Fed lowered rates three times in anticipation of an economic slowdown. By slashing rates, the thought is businesses will take out more loans to expand production and hire new workers. Lowering interest rates also makes the bond market less attractive as the yields for bonds fall leading to a larger investment in stocks. The Fed Funds Rate target is now between 1.5% and 1.75%, a decrease from June’s rate of 2.5%
Consumers Fueled the Economy in a Big Way
One of the best ways to judge economic prosperity is to take note of your surroundings. Are people actually spending their hard earned money? According to the data, the answer is a resounding yes. Consumption has accounted for 85% of GDP over the past 5 years. Even under the premise that the good days must end soon, consumers are still spending at restaurants, movie theaters, retail stores… you name it, consumers are buying it. When consumption rises, GDP rises in turn.
Interestingly enough, the runaway consumption of the 2000s is what led to economic catastrophe when household debt reached 99% of GDP and the savings rate fell to 0. Current consumers are much smarter with their money as the savings rate is now roughly 8%. The disposition of many consumers remains the same, they may be scarred by the prior decade, but they’re confident enough in the economy to spend.
What to Expect in 2020
The one truth throughout life is that no one can predict the future… unless you count Nostradamus. While analysts predict the music has to stop at some point, there are several key developments that provide a sense of optimism for 2020.
Finally… A Trade Agreement With China
One of the main worries for investors in 2019 was the uncertainty of the US-China trade deal. On the last day of the year, President Trump announced the phase one agreement of a comprehensive trade deal with China. In a tweet on December 31st, Trump announced that he will sign phase one of the deal on January 15th.
The deal will hopefully bring an end to a prolonged trade war with China in which the Trump administration imposed $360B in tariffs on Chinese goods. China retaliated by imposing $110B in tariffs on US goods. The main goal of a tariff is to cause domestic consumers to only buy domestic goods because they are ultimately cheaper than foreign goods.
The goal of tariffs may be to protect domestic producers, but they usually precede retaliatory tariffs by the targeted nation – hence the trade war. Tariffs affect a nation’s economic output as it sells less goods due to an increase in price. The Purchasing Managers Index, a measure of manufacturing, found that the American economy experienced the lowest level of manufacturing since the great recession. Now that a trade deal seems to be on the way, manufacturing will likely rise – a positive sign for GDP.
Brexit Likely to Conclude With a “Soft-Exit”
On June 23, 2016, the United Kingdom shocked the world by voting to leave the European Union. Known colloquially as Brexit, the leave was triggered to happen in March 2019 before the proposed Brexit deal was rejected by MPs and then October 31st, before that deal was rejected by MPs as well. A new deadline has been set for January 31, 2020, but the tone is more optimistic. The fear for global investors over the past three years was that Britain would undergo a “Hard-Brexit” in which the nation would leave the EU without first establishing a formal trade agreement.
In the event of a “Hard-Brexit”, the UK would lose preferential access to European markets which would result in a contraction of its economy and a decline in value of the British pound. As almost 30% of food in the UK comes from the EU, shelves would run empty in supermarkets and become more expensive due to overall scarcity. With the resulting decline in value of the British pound, energy would also likely be much more expensive. The resulting impact on the British economy would mean that the UK would become a much less attractive place to conduct business for foreign investors.
As it appears now that a “Soft-Brexit” will likely be achieved, investors are much more optimistic about the state of the global economy. In this scenario, the U.K. would first negotiate a trade deal with the E.U. and remain in a transition period for one year before officially leaving. The likelihood of a “Soft-Brexit” has calmed financial fears for now.
What Were the Top Performing Franchises in 2019?
2019 was generally a positive year for many companies. Some companies that experienced success in 2019 were franchises! When someone buys a franchise, they purchase a license to provide services or distribute a product under a more established brand. Franchises typically offer support in areas such as design, training, staffing, and marketing.
Here’s our list of the top franchises in 2019:
The coffee and donut conglomerate reported sales growth of 2.4% and an increase in revenue of 5.9%. Total revenue has experienced steady growth since 2016 and appears to have hit $1.4B in 2019, up from $1.2B in 2016.
- Approx. Initial Fee: $40,000 – $90,000 (per 2019 FDD)
- Approx. Startup Cost: $97,500-$1,597,200 (per 2019 FDD)
- Approx. Revenue Range: See FDD
GNC, a global leader in nutritional supplements, has rallied well in 2019. The nutrition company expects to see a 19% growth in earnings in the next five years due to a deal with International Vitamin Corporation and has also inked a deal with Walmart to use its Amazon online marketplace to sell products. There are currently over 4,000 franchise outlets in operation that stand to benefit.
- Approx. Initial Fee: $40,000 (per 2019 FDD)
- Approx. Startup Cost: $149,722 – $388,630 (per 2019 FDD)
- Approx. Revenue Range: See FDD
The fitness studio franchise took the gym industry by storm in 2018 and continued that trend in 2019. In 2018, Orangetheory reached $1B in sales and grew to over 1,000 locations. The company announced over 500 new locations in development for 2019. Orangetheory also plans to announce its one millionth member very soon making the gym franchise an attractive option for prospective franchisees.
- Approx. Initial Fee: $59,950 (per 2019 FDD)
- Approx. Startup Cost: $575,422 – $1,497,372 (per 2019 FDD)
- Approx. Revenue Range: $317,079 – $2,418,483 (per 2019 FDD)
The hotel/motel giant with 30 brands under its name signed 816 franchise agreements over the past year! Marriott’s 2019 revenue totaled approximately $21B, a modest increase from the previous year. Revenue has increased nearly $5B since 2016, making a Marriott franchise or subsidiary franchise a viable option for prospective franchisees.
- Approx. Initial Fee: Varies per Brand
- Approx. Startup Cost: Varies per Brand
- Approx. Revenue Range: Varies per Brand
2020 Continues to Look Optimistic for Investors
Spurred on by consumer confidence, a potential end to the China trade war, and a “Soft-Brexit”, the global economy may continue along the same growth pattern for the 11th straight year – the longest sustained period of economic success since the 1850s. Entrepreneurs continue to look into business opportunities, including franchises.
By Tyler Dikun and Jim Notaris