Small business optimism showed a meaningful pullback in November on both an absolute basis and relative to expectations.  While economists were forecasting the headline index to come in at a level of 107.0, the actual reading was 2.2 points lower, making it the weakest report relative to expectations since April and the largest m/m decline since March.

After hitting record high levels back in August, the NFIB Small Business Optimism Index has now seen three straight monthly declines, and like a few other indicators, it’s showing signs of rolling over.  With that, we’ve heard and read a number of comments suggesting that this decline is another signal that the business cycle may be turning.

In our section on “Economic Cycles” for this year’s 2019 outlook report that was published last Friday, we highlighted a number of economic indicators that have had pretty good records historically at anticipating a turn in the business cycle.  One indicator that was not included in that section is the NFIB’s Small Business Optimism Index.

The chart below is the same one as above, but we have also overlaid periods of recession with gray shading.  From this perspective, it is pretty obvious that there has been very little correlation to peaks in the Small Business Optimism Index and the onset of recessions.  In fact, the two times the index peaked at or around similar levels was actually closer to the beginning of an expansion than the end.  This is not to say that this indicator is suggesting strength or weakness in the economy going forward, but instead to simply point out that it hasn’t been the best indicator in terms of predicting the business cycle.

Which indicators should investors be watching for signs of a turn in the business cycle?  Sign up today for our 2019 Annual Outlook Special to receive access to our section on “Economic Cycles” and find out!

A key characteristic of this correction during its early stages in late September and October was the unrelenting selling pressure that went on during regular trading hours.  While futures were either flat or even pointed higher on a lot of trading days, the selling began pretty much immediately after markets opened at 9:30 AM ET and didn’t let up until the 4 PM close.

This type of intraday selling is not a bullish sign, so today we wanted to update the readings to see where things stand as the correction closes in on three months in length.

Below we show the cumulative change since 9/20 (the date of the high for the S&P) of buying SPY at the close every day and selling at the next open (after hours) versus buying at the open every day and selling at the close (intraday).  If you only owned SPY after hours during the current correction, you’d actually be in the green with a gain of 1.1%.  Had you only owned intraday by buying at the open and selling at the close, however, you’d be deep in the red with an 11.2% decline.  This means that more than 100% of the S&P’s losses during the current correction have come during regular trading hours.

Looking at this strategy for all of 2018, had you only owned SPY after hours this year, you’d still be up 10.8%.  If you only owned during regular trading hours, you’d be down 10.9%.

As you can see in the chart, there were two periods where these two strategies diverged.  One came towards the end of Q1 into early Q2 when the after-hours strategy traded sharply higher as the intraday strategy plummeted.  The second came at the start of the current correction when the intraday strategy started to collapse while the after-hours strategy continued to tick higher.

Below is a quick market stat to log as 2018 nears an end and 2019 approaches.  In the chart, we show the S&P 500’s average price change in years ending in 0 through 9.  This data goes back to 1928 when the S&P 500 begins.

As shown, years ending in “8” have historically seen the S&P 500 gain an average of 10.7%.  At one point earlier in 2018, this type of gain seemed likely, but not anymore now that the S&P is down 2% YTD.

Years ending in “9” have historically seen an average gain of 8.1%, which is just a hair above the average of 7.5% seen for all years since 1928.

The best years have come in years ending in “5” with an average gain of 22.4%.  Years ending in “3” rank second with a gain of 15.4%.

On the negative side, years ending in “0” and “1” have both averaged losses throughout history.

Below we show the consistency of positive returns for the S&P 500 in years ending in “0” through “9”.  As shown, years ending in “5” have been positive 88.9% of the time (8 out of 9), while years ending in “0” and “1” have been positive just 44.4% of the time (4 out of 9).

The major US index ETFs are starting off the week on a far weaker note following last week’s sell-off. Every ETF in this group has fallen over 3% since this time last week. The Russell 2000 (IWM) and Core S&P Small-Cap (IJR) have led the way down falling 5.14% and 5.36%, respectively. Despite attempting to press above their 50-day moving averages at one point last week, currently, these ETFs have collapsed well below their 50-DMAs into oversold territory. As YTD gains either turn to losses or become just barely positive, long-term trends have remained biased to the downside. The Nasdaq (QQQ) is the only ETF in the group that has maintained any sort of significant gains YTD.