SPDR S&P 500 ETF (ETF:SPY), (DJIA) – What record stocks mean for the small business loan market

Stock indices continue to reach historic highs in the United States. On November 8, the Down Jones Industrial Average firm with an increase of 18.7% since January 1. The S&P 500 and Nasdaq closed with an annual gain of 23.4% and 27.7%, respectively.

While this is good for investors, what about small businesses? There is a direct correlation between the stock market and small business loans.

Interest rate

There is a wide diversity of opinions regarding the relationship between stocks and interest rates. However, there is a correlation that can be seen when it comes to interest rates and expenses.

When interest rates rise, people tend to spend less. When they spend less, businesses make less money. When they report less revenue, the stock price goes down. As such, you can see that interest rates often follow the market.

Five-year rate chart showing the federal funds rate. Image reproduced with the kind permission of macrotrends.

When the markets are at their peak, interest rates will tend to rise. There are a number of reasons, including government (i.e. the Fed) intervention. So many times you will see higher interest rates with small business loans when the markets are up.

Many value stocks are banks

Many investors invest money in value stocks. These are the stocks that are trading lower than their fundamentals indicate.

Currently, many of the largest banks in the world fall into this category, including Bank of America (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Citigroup (NYSE: C) and Wells Fargo (NYSE: WFC). Citigroup is a perfect example, as its P/E ratio in June was half that of an average S&P 500 company.

This is a double edged sword when looking for a small business loan indicator. As more and more people invest in these stocks as a sign of confidence, these companies still tend to be stricter in their business dealings in order to maintain that confidence. Thus, many banks are tightening their lending restrictions.

Best Loans in Bull Markets

In this type of economy, there are several small business loans you should consider: primarily conventional, SBA, and lines of credit.

If you opt for a conventional loan, just be sure to lock in a fixed rate. Otherwise, you could end up with payments you can’t make when the rate rises thanks to the markets.

A loan guaranteed by the Small Business Administration is one way to go because the SBA sets the rates. You will never pay more than the SBA allows when it guarantees the loan. There are many qualifications for SBA loans, which means they take longer than conventional loans, but it might be worth the wait.

A business line of credit is also an option for a small business that wants immediate cash without waiting for the SBA. A line of credit can have a fixed or variable rate. If it is variable, you can spend when the rate is low. However, the fixed will allow you to spend at any time knowing that your rate is guaranteed no matter what the markets do.

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Priscilla C. Carnegie