Wednesday, January 20, 2021

NFIB Survey: Sends A Strong Warning About Small-Cap Stocks (IWM)

Although we use the Russell 2000 ETF as shorthand for the small cap stock universe it is really too broad for most purposes. That said it has been on a tear since the March 2020 lows, far outstripping both the S&P 500 and emerging markets:

BigCharts (also on blogroll at right)

And that combined with the article below may be where opportunity lies.

From Lance Roberts of Real Investment Advice via Advisor Perspectives, January 19:

In September 2019, I wrote “NFIB Survey Trips Economic Alarms,” Of course, it was just a few short months later the U.S. economy fell into the deepest recession since the “Great Depression.” The latest NFIB survey is sending a strong warning to investors piling into small-cap stocks.

While the mainstream media overlooks the NFIB data, they really shouldn’t. There are currently 30.7 million small businesses in the United States. Small businesses (defined as fewer than 500 employees) account for 99% of all enterprises, employ 60 million people, and account for nearly 70% of employment. The chart below shows the breakdown of firms and jobs from the 2019 Census Bureau Data.

NFIB Small-Cap Stocks, NFIB Survey: Sends A Strong Warning About Small-Cap Stocks

Despite all the headlines about Microsoft, Apple, Tesla, and others, small businesses drive the economy, employment, and wages. Therefore, what the NFIB says is relevant to what happens in the economy.

NFIB Shows Confidence Drop

In December, the survey declined to 95.9 from a peak of 108.8. Notably, many suggest the drop was “politically driven” by conservative owned businesses. While there was indeed a drop following the election, the decline continues what started in 2018.

NFIB Small-Cap Stocks, NFIB Survey: Sends A Strong Warning About Small-Cap Stocks

As I discussed when the index hit its record high previously:

“Record levels of anything are records for a reason. It is the point where the sustainability of activity can not be increased further. Therefore, when a ‘record level’ is reached, it is NOT THE BEGINNING, but rather an indication of the MATURITY, of a cycle.”

That point of “exuberance” was the peak of the economy.

Before we dig into the details, let me remind you this is a “sentiment” based survey. Such is a crucial concept to understand as “Planning” to do something is a far different factor than actually “doing” it.

An Economic Boom Will Require Participation

Currently, many analysts expect a massive economic boom in 2021. The basis of those expectations is massive “pent-up” demand when the economy reopens.

I would agree with that expectation had there been no stimulus programs or expanded unemployment benefits. Those inflows allowed individuals to spend during a recession where such would not usually be the case. Those artificial inputs dragged forward future or “pent-up” consumption into the present.

However, the NFIB survey also suggests much the same.

Small businesses are susceptible to economic downturns and don’t have access to public markets for debt or secondary offerings. As such, they tend to focus heavily on operating efficiencies and profitability.

If businesses were expecting a massive surge in “pent up” demand, they would be doing several things to prepare for it. Such includes planning to increase capital expenditures to meet expected demand. Unfortunately, those expectations peaked in 2018 and are lower again.

NFIB Small-Cap Stocks, NFIB Survey: Sends A Strong Warning About Small-Cap Stocks

There are important implications to the economy since “business investment” is a GDP calculation component. Small business capital expenditure “plans” have a high correlation with real gross private investment. The plunge in “CapEx” expectations suggests business investment will drop sharply next month.....


IWM $214.96