Based on the recent readings in Consumer Confidence and the NFIB Small Business Optimism Index, consumers and small business owners have very little concern about the economy.
The National Federation of Independent Businesses released its January survey results on Tuesday morning and the reading came in at 104.3 and that was up from 102.7 in December. The highest reading over the last 12 months was in May when the index hit 105. The index has been above the 100 mark since November 2016 and that is the longest stretch of such readings since the 2005-2006 timeframe.
Because the small businesses that participate in this survey generate most of their sales from their own areas and see generate very little of their revenue from overseas, this group has been insulated from the trade war between the U.S. and China. The impact of the coronavirus on these businesses remains to be seen, but at this point, I wouldn’t expect it to have a huge impact.
The biggest concern expressed by participants was finding enough skilled employees to hire. This has been one of the biggest concerns for this group for some time now. Many owners have expressed that they have increased pay and benefits in an effort to attract and retain talent.
The Conference Board released its latest consumer confidence reading back on January 28 and the reading jumped to 131.6 and that is the first time the reading has been above the 130 mark since August. Like the NFIB index, the consumer confidence index has been elevated for quite a while now. The readings have been above the 120 mark since October 2017 and this is the longest stretch of such readings since the 1999-2000 timeframe.
The chart shows that the current readings haven’t reached as high as they did back at the turn of the century, but they are elevated none the less. There were six months back in 2000 where the index was above the 140 level.
In an article last week I pointed out how investors jumped right back into the market after being fearful about the coronavirus and its impact on the global economy for approximately 10 days. One thing the two weeks of selling did do was cause the overall market sentiment to fall. The Investors Intelligence Bull/Bear ratio dropped from 3.32 on January 21 to 2.49 on February 4.
The AAII Sentiment Survey showed a bullish percentage of 45.6% and a bearish percentage of 24.8% on January 23. After the selling, the bullish percentage dropped to 32% and the bearish percentage jumped to 36.8%.
While the drop in investor optimism is a good sign when stocks are falling, I have the feeling that the surveys will jump again when the results are released this week. The rally in stocks during the first week of February was a strong move and it seems like investors did what they have been trained to do in recent years—buy the dips.
This strategy has worked for the better part of the last 11 years, but what is going to happen when we have another bear market? What will investors do when we go through another period like we had in 2000-2002 and 2007-2009? There are a lot of new individual investors and investment professionals that haven’t been through a bear market. Will they keep buying the dips as institutional investors are selling and then capitulate when the market nears its bottom? That has been the story during most bear markets—the average investor finally gives in and sells everything and that marks the end of the bear market.
For now, the momentum is still to the upside and the indices are hitting new highs again this week, but there will come a time when buying the dip isn’t going to work. And based on how strong the upward momentum has been, I am concerned that the opposite reaction will be just as strong.