When you consider that gasoline prices are near their lowest of the decade and jobs are firming up, you would expect that small-business owners should be optimistic.
Yet they’re not. In fact, new data from the National Federation of Independent Business shows the Index of Small Business Optimism fell 1 point in February to 92.9, which is very weak.
Analyst Steve Schork points out that after rising to the 40-year mean of 100.2 back in December 2014, the index is now testing the mean of the last six recessions, which is 92.3. In other words, the bear market in crude oil has led small businesses to grow more worried about the future, not more hopeful.
In his report, Schork quotes directly from NFIB report author William Dunkelberg: “Overall, a ‘ho hum’ outcome, confirming that the small business sector is not headed up with any strength, just treading water waiting for a good reason to invest in the future. Spending and hiring plans weakened … as expectations for growth in real sales volumes fell. Earnings trends worsened … as owners continued to report widespread gains in worker compensation while holding the line on price increases (more firms cut prices than raised them). The political climate continued to be the second most frequently cited reason for the current period being a bad time to expand.”
There is obviously a lot of data that suggests business is anemic but steady in the United States. But when you look at these numbers and commentary — and consider that small businesses are responsible for most of the employment in this country — you realize that the picture may not be all that rosy. Something to think about.
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Jason Goepfert, of Sundial Capital, made an interesting observation last week. While financial television shows were celebrating the ninth anniversary of the bull market, a more relevant milestone was also reached: The S&P 500 has gone 200 days since its last 52-week high, while at the same time it has not fallen into a bear market.
This turns out to be a relatively uncommon phenomenon, and similar situations over the past 90 years have led to below-average returns over the next three to six months.
This matter of being down a long time but not down enough to create a cataclysmic panic means we are in no-man’s-land. Goepfert then asked his database this question: “How long can we go without hitting a new high and also not falling into a bear market?”
Quite a while, it turns out. Going back to 1928, he looked at every time the S&P 500 went 200 days without hitting a 52-week high and without declining more than 20% from that high. Out of the 14 precedents, six ultimately ended up mired in bear markets (1949, 1957, 1969, 1973, 1981 and 2001), meaning eight of them managed to avoid a 20% decline before recovering. So, technically, stocks had a better chance of moving to a new high than falling into a bear market.
But it wasn’t exactly rosy, Goepfert found. A month later, the market was essentially flat on average; after three months it was still flat (vs. +2.9% for all such periods); after six months it was down slightly (vs. +4.3% for all such periods); and a year later it was up only 6% on average (vs. 8.1% for all such periods).
The results going forward were even worse when the market was not in recession, and worse yet when valuations were relatively high, as they are now.
This data suggests that we may be in for another stretch similar to 2015, which amounted to 12 months of mostly flat returns punctuated by a few scary dips and some abrupt recoveries. Kind of puts a damper on the whole bull market birthday party.
Best wishes,
Jon Markman
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