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Cross Walking Market Turmoil Back to the Real World

10 questions to help executives, managers, and business owners make sense of the recent market turmoil

Crosswalk zebra crossingIt’s been a rough couple of weeks for the capital markets, and in particular, the equity markets. Spurred by a major drop in Chinese equities, developed market equities have fallen anywhere between 7% and 12% across the past 10 days.

Most of the media reporting focuses, understandably, on the market movements and – at best – first-order implications of lower asset prices (i.e., plenty of articles about what the average investor should do).

Very little of the conversation is about what executives, managers, and owners in the “real” economy should be doing. This obviously matters a lot: a few leaders run companies whose entire economic model hinges on the prices of financial assets (hedge funds, asset managers, etc.), but most of us run companies where this pricing is one of many factors that should influence how we hire and promote people and deploy investments across our business.

The good news for management teams asking “what does this mean for our business?” is that there are only two mistakes that we can make in times like this:

  • First, we can overreact. Asset prices, both relative and absolute, are a reflection of a variety of factors – most notably investor sentiment, liquidity and relative risk preference. Few of these are correlated to overall economic growth and demand, and none are perfectly correlated the precise pattern of demand in any one of our individual businesses.

    Simply put, capital markets are a lot more volatile than underlying economies – in the US, equity market corrections happen more than four times as often as actual recessions. If leaders made hiring and investment decisions using capital markets performance as a leading indicator, we’d be in a lot of trouble.

  • Second, we can pretend it’s business as usual. While market turmoil like we’ve seen recently should not drive wholesale re-evaluation of plans and strategies, we’d be equally foolish to completely disregard it as an input.

    • In some cases this is obvious. Major shifts in commodity prices have sharply changed the profit and/or cost profile for commodities-linked or dependent businesses, and asset manager toplines suffer immediately as assets under management fall.

    • In other cases less so. The markets are sending some messages about the relative cost of capital for different markets that might change how firms think about expansion and M&A.

    • Most importantly, corporate strategies need to reflect the reality that employees, managers, and even corporate purchasers are – well – people first. To imagine that a sudden compression in personal wealth or a sustained negative financial news cycle doesn’t affect how they will make decisions about effort, career choices, or purchase decisions is to ignore 40 years of work in behavioral economics.

To help executive teams identify, and answer, the right questions that this should engender, a few of our research leaders put together a great “playbook” to help companies navigate – and even seize competitive advantage from – this cycle.

I encourage all leaders to check it out in its entirety, but I’ll give you a preview of our Top 10 list here:

  1. Are we helping others distinguish signal from noise?

  2. Are we putting the situation in context?

  3. Are we turning off our customers?

Should the current correction become a deeper slow down, the questions get harder:

  1. Do our existing cost-containment plays still stand?

  2. Have we overlooked any areas of exposure?

  3. Is additional financial oversight doing more damage than the economic situation that triggered it?

  4. Has our M&A pipeline become vulnerable to other buyers?

  5. Even if we’re ok, how healthy are our suppliers?

  6. Are we keeping an eye on our HIPOs?

  7. Are our talent pipelines deteriorating in impacted regions?

How are you handling the market turmoil in your business? And how many of these questions are your teams ready to answer? We’d love to know—and to help.

 

More On…

  • A version of this post originally appeared on LinkedIn.

 

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