Small Business Optimism Turns Decidedly Negative

The NFIB Small Business Optimism Index turned decidedly negative in December. The index fell 5.5 points to 95.9 and is below the index's long run average of 98. NFIB reported 9 of the 10 index components declined. The survey report notes, "The drop in small business optimism was historically very large...Most of the decline was a result of substantial weakness in the outlook for sales and business conditions in 2021 which brings new Covid threats and the uncertainty about economic policy with a new administration in Washington." Small business owners excepting better business conditions over the next six months came in at minus 16, a 24 point decline from the month earlier and the second largest drop since 1986.

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Broadening Participation In Equity Market Asset Classes

One favorable aspect of the recent equity market performance is the broadening participation of asset classes other than the large cap FANGMA stocks, Facebook (FB), Amazon (AMZN), Netflix (NFLX), Google (GOOGL), Microsoft (MSFT) and Apple (AAPL). As the below chart shows, during the first eight months of 2020, the average return of this basket of stocks significantly outpaced the other asset classes shown on the chart.

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Winter 2020 Investor Letter: From Pandemic To Transition

The just completed year of 2020 saw the S&P 500 Index increase a strong 18.4% and this is on the back of a 31.5% return in 2019. One might not have expected this with a large number of state economies constrained by virus mandated restrictions early in the year. For the five calendar years from 1995-1999 the S&P 500 Index returned 20%-34% in each year. Could the market be in for a repeat of that type of performance? The so-called roaring 1920’s occurred after the Spanish flu of 1918/1919; partially a result of satisfying pent-up demand.

Our Investor Letter touches on some of these topics and our viewpoint on the year ahead.

• Winter 2020 Investor Letter

Stock Buybacks Increase As Reported Earnings Jump

S&P Dow Jones Indices' recent report on buyback activity for the third quarter shows buyback activity increasing to $101.79 billion from $88.66 billion in the second quarter. With the economy mostly reopening, at least through Q3 2020, companies reported an improvement in 'as reported earnings,' increasing to $273.2 billion versus $98.5 billion for the first quarter. As the red line in the below chart shows though, buybacks remain far below the fourth quarter 2018 peak of $222.98 billion.

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Too Many Individuals On The Sidelines

In the blog post I wrote about a year ago commenting on the October 2019 Job Openings and Labor Turnover Survey (JOLTS) I noted the employment market was extremely strong and there were not enough workers to fill job openings. At that time the unemployed workers per job opening ratio was .81. In other words there were more job openings than unemployed. Fast forward one year later to the October 2020 JOLT survey released last week, that ratio now stands at 1.66. Too many potential workers are now out of the labor force.

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Small Business Optimism Ticks Lower

The NFIB's November Small Business Optimism Index declined 2.6 points to 101.4. As NFIB notes in their report the Index level is at a historically high level with the 47-year average reading equaling 98. Below are a few key findings in the report:

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Broadening Equity Market Participation

It seems a broad range of equity indices are hitting new all time highs every day and some investors question whether this can continue. The S&P 500 Index closed at an all time high Friday, December 6, bringing its year to date return to 14.5% on a price only basis. In earlier posts I discussed the roller coaster ride of the market as it traversed the coronavirus shutdown and reopening. The S&P 500 Index fell 33.9% from February to March and has bounced higher by 65.3% from the March 23 low. And since the election in early November, the S&P 500 Index is up 12.5% with only one of the five weeks down a fractional .76%.

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Earnings Matter And They Have Improved Significantly

This week the government released the second estimate of third quarter U.S. GDP at 33.1% growth at an annual rate, unchanged from the earlier advanced estimate. This is a sharp snapback from second quarter's 31.4% contraction. Of course this significant swing is a result of the virus mandated economic shutdown and reopening.

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Shorts Getting Squeezed

If the performance of Refinitiv's U.S. Most Shorted Stocks Index is any indication, the shorts have been caught off guard since the market has accelerated higher over the last two months. Most of the move began subsequent to the U.S. election. As the below chart shows the Most Shorted Index is up over 30% while the S&P 500 Index is up 7.9%. Investors likely are not surprised by some of the performance contributors over the last month like, Nordstrom (JWN) up 91%, Plug Power (PLUG) up 74%, Macy's (M) up 52%, Carnival (CCL) up 34%, just to name a few of the companies in the Short Index.

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Dogs Of The Dow Are Dogs This Year

With less than thirty trading days left in the year, the Dogs of the Dow have a great deal of ground to make up just to be competitive with the return for the Dow Jones Industrial Average Index and the S&P 500 Index. Not one of the Dow Dogs has a positive return on a price only basis this year. The Dow Dogs are down 15.0% on a price only basis and down 11.2% on a total return basis. The Dow Jones Industrial Average Index also lags the S&P 500 Index but has generated a positive return to date. On a price only basis the SPDR Dow Jones Industrial Average ETF (DIA) is up 2.6% and up 4.7% with dividends. The SPDR S&P 500 Index ETF (SPY) is up 10.4%, price only and up 12.0% with dividends.

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