The National Federation of Independent Businesses released today their Small Business Optimism report.  In this report, they track the results of their monthly survey of its members to produce their proprietary Small Business Index (SBI).  The survey is based on answers to the following 10 questions:

• Plans to increase employment

• Plans to make capital outlays

• Plans to increase inventory

• Do they expect the economy to improve

• Do they expect real sales higher

• Current Inventory

• Current job openings

• Expected credit conditions

• Now is a good time to expand

• What is their earnings trend

Based on answers provided in July, the SBI rose 2.2 points to 93.7, the highest reading since February 2022.  However, July’s index at 93.7 is the 31st consecutive month below the 50-year average of 98.0.  Small business owners referenced that inflation was their number one issue with 25% reporting it as their single most important problem in operating their business.  The inflation concern has increased by 4 points from the June report.

NFIB Chief Economist Bill Dunkelberg provided the following commentary for July’s reading:

“Despite this increase in optimism, the road ahead remains tough for the nation’s small business owners….Cost pressures, especially labor costs, continue to plague small business operations, impacting their bottom line. Owners are heading towards unpredictable months ahead, not knowing how future economic conditions or government policies will impact them.”

The business sectors have not recovered equally with the economy since the pandemic.  As the chart from the same NFIB report illustrates below, the larger the size of the company in employees the better their optimism. 

Looking at the history of the SBI going back to January 1975, the SBI has fluctuated from its lowest reading of 80.1 in April 1980 to a record high of 108.8 in August 2018.  After the economy started to fully recover by 1983, Small Business Owners’ optimism soared and remained above 94 for decades except for the periods September 1990 to January 1991 and June and July 1993.  However, the nearly 25-year streak of optimism with the SBI above 98 ended just before the 2008 Great Recession, and by March 2009 the SBI had dropped to the second lowest level in history to 81.6.  It didn’t take long for the SBI to recover somewhat to 88 by August 2008 but remained volatile for the following seven years.  During this period, the SBI had peaks and valleys ranging from 87.1 (November 2012) to 100.3 (December 2014) until November 2016 when the index soared 10.4% from October’s reading of 94.9 to 105.8 by December 2016.  Small Business Owner’s optimism eventually peaked at its highest SBI recorded level of 108.8 in August 2018. 

The 2020 pandemic and the business environment have been very difficult for all businesses, especially for small businesses.  The small business owners don’t have the resources and credit facilities compared to their larger business peers.   Fluctuations in sales and revenues are more impactful for small businesses covering costs for inventory and staff during slow periods and attempting to rebuild during economic uptrends. 

Currently, businesses are struggling to maintain their employees with competitive salaries while costs for financing and inventory continue to rise faster than earnings.  This month the Federal Reserve outlined an overall positive view of the economy with limited indication of a rate cut after their September meeting.  Even without the Federal Reserve reducing their discount rate, loan rates have softened helping home buyers and business owners.  As an example, last week fixed mortgage rates were in the mid-6 % range. 

What Does This Mean to Me?

Since the pandemic, large national corporations have been able to navigate more efficiently than mid and small-sized companies.  The biggest challenge facing smaller companies once the pandemic restrictions had eased were changes in prices for inventory and availability of materials.  However, the Federal Reserve rate hike campaign that began in March 2022 has been particularly damaging to small businesses that depend on loans to cover shortages or future expansion. 

The below chart compares the three major indices of the S&P 500 (large companies – purple line), S&P 400 (mid-sized companies – orange line), and S&P 600 (small companies – blue line).   The small cap index rallied in late 2020 and by March 2021 was the best-performing index in cumulative returns since January 2020.  However, the lead was short-lived in 2021 and once the Federal Reserve started raising rates in March 2022, the S&P 600 has been the worst-performing index of the three increasing only 31.43% compared to 68.2% for the S&P 500 since January 2020. 

We maintain our favorable view of the US economy and stock market.  The stock market seems to be recovering from the summer weakness that started on July 16. 

The S&P 500 index is still below its 20, 50, and 200 Day Moving Average (DMA).  Also, all three DMA are upside down to a normal growth trend in which the 20 DMA would be above the 50 DMA that would be above the 200 DMA.  This means that in a positive trend, the S&P 500 has been rising faster in the last 20 days than the past 50 days and the past 50 days rising faster than the past 200 days. The current opposite formation means the index has been declining faster in the previous 20 days than in the previous 50 and 200 days.

The recent bounce back is encouraging but would recommend patience with new investments in the market.  Look for down days with the major indices or with the stocks you want to buy.  The presidential election may prompt institutional investors to remain cautious with their new allocations which will limit the stock market’s recovery.  Should the economy continue to be stable into the election we believe it will only be a matter of time before institutional investors will be allocating more to stocks and initiating the next rally.  What remains to be seen is if the S&P 600 index will rebound and outperform its larger peer indices during the next rally. 

Let us know if you have any questions about this Update or your account.  We welcome the opportunity to be of assistance to you and your family in achieving your financial goals.