A key small business sentiment index is reflecting an increasingly positive outlook since the November election. The NFIB Small Business Optimism Index (Charted below) reports expectations among small business owners for hiring plans, earnings, job openings and business conditions. The 7.4 point December rally of the index helped it achieve the largest year-over-year gain since October 1983. It now sits 105.8 – two standard deviations above it average and its highest reading in 12 years.
In the past this bullish indicator has coincided with outperformance of the domestic stock market. Only ten cases of NFIB index increases over 3.5 points have occurred in the past 30 years. Interestingly, the chart below shows economic growth and market performance following these periods of euphoria. On average, median economic growth showed only modest improvement and lasted three months before returning to trend growth. Stock market performance, however, was much more robust and long lasting. On average, the S&P 500 notched outsized gains for up to a year after the jump in small business sentiment.
The NFIB index indicates that small business owners have high expectations for business friendly policies and a pro-growth economic environment. Although this euphoric sentiment may signal more modest economic gains, that might not matter for equity investors. After all, stock markets are driven in large part by expectations of future growth. Our portfolios remain overweight equities. When expectations are high, markets tend to perform well.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance is no guarantee of future results.
Stock investing involves risk including loss of principal.