Chart of the Day – Economic Indicator Diffusion Index Hits a Ceiling
Small Business Labor and Inflation Slumping
The NFIB released its October data on small business optimism this morning. The headline index was expected to show further deterioration in optimism, and exactly that occurred as the index fell to 91.3 from last month’s reading of 92.1 versus expectations of 91.4. This month’s reading is off of the spring lows which had surpassed the worst levels from the early stages of the pandemic but remains one of the weakest readings of the past several years.
In the table below, we provide a breakdown of each category of the report. The headline index is now just off the bottom decile of readings as most components are likewise historically depressed. While the report was weak, there were some exceptions with strong showings in labor market metrics like Plans to Increase Employment, Job Openings Hard to Fill, and Compensation.
Even though these labor market metrics have remained at very high levels from a historical perspective, they have largely been rolling over for the better portion of the past year. Hiring plans as well as the percentage of firms reporting cost or quality of labor as their biggest issues are back to similar levels as the year prior to the pandemic. Meanwhile, actual employment changes are negative (as they have been throughout the pandemic) implying businesses are reporting a net decline in workers. That is in spite of still elevated compensation and a sharp spike higher in compensation plans. In fact, that index is just shy of the peak from the final months of 2021 after a record 9-point month-over-month jump. Companies are also reporting job openings remain hard to fill, although that index has also been on the decline alongside hiring plans. This month, the reading was unchanged at 46, the lowest level since June 2021.
Sales components have experienced far greater degrees of deterioration than employment metrics. The outlook for general business conditions has rallied back somewhat in the past few months, but it remains well below its historical range. Given the weakness in small businesses’ economic outlook, few report now as an opportune time to expand their businesses. Actual sales changes dropped to -8 in October which matched August for the weakest showing for sales since August 2020. Back in 2020 though, this index was far lower than it is now.
While the reading on the top line has held up relatively well, high inflation has meant the bottom line has taken a big hit. A net 30% of small businesses reported earnings have fallen. That reading did improve last month, though, as there have been fewer businesses reporting higher prices. In spite of those improvements, each of those indices has a long way to go until returning to what have historically been more normal levels.
As mentioned above, a historically low share of businesses are reporting positive sentiment on the economy and that has dampened their hopes of expansion. When questioned on the reason for not expanding, 44% reported economic conditions as the reason. Another 17% reported economic conditions as the reason for uncertainty on whether or not they would expand. Aptly coming out on Election Day, we have highlighted in the past the political nature of the NFIB survey. As such, it should come as little surprise that the next biggest reason for small business hesitancy in expanding has been the political climate. Assuming the survey results react to the current election in a similar way as in the past, a strong election showing for Republicans could provide a boost to small business sentiment and plans for expansion. Finally, given continued high inflation and rates rising to combat it, the next two most widely mentioned reasons to not expand were the cost of expansion and financial conditions and interest rates with a combined 9% of responses Click here to learn more about Bespoke’s premium stock market research service.
Bespoke’s Morning Lineup – 11/8/22 – Time to Vote
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“The fact that so many successful politicians are such shameless liars is not only a reflection on them, it is also a reflection on us.” – Thomas Sowell
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Election Day is here, and hopefully, that means when we all come in tomorrow morning, the midterms will be behind us and markets can shift their focus to Thursday’s CPI. Futures are higher this morning in a modest drift higher, and the market attempts to digest the impact of higher rates. Earnings reports are still coming in hot and heavy, but the majority of the S&P 500’s largest companies have already reported, so until the retailers start reporting next week, there aren’t likely to be any major tape bombs.
28 years ago today marked the beginning of the “Republican Revolution” where Newt Gingrich led the Republican Party to gain control of both the House and Senate for the first time in more than 40 years. The 1994 midterms saw the Republican party gain 54 seats in the House and 9 seats in the Senate. The performance of Republicans in 1994 was the best in a midterm election for the party since 1946 when they picked up 12 seats in the Senate and 55 seats in the House. Since 1994, the only other midterm year where either the Democrats or Republicans picked up more seats in the Senate was in 2014 (R+9), and the only midterm where there was a larger increase for either party was in 2010 (R+63).
We won’t know until after all the votes are counted, but betting markets and many national polls suggest that like 1994, the Republican Party will win control of both the Senate and House. Given the already closely divided nature of both chambers of Congress, though, the number of seats expected to be picked up in this cycle is expected to be much smaller (3 in the Senate and around 30 in the House). Barring an extreme outcome (in either direction), though, there is unlikely to be much in the way of changes legislatively, so get ready for two years of gridlock.
As big as the Federal government has become over the decades, the impact of party control on financial markets tends to get overstated. While it most definitely has impacts on certain industries, the direction of the economy and financial markets won’t be dictated by the actions of a few hundred people in DC. Or at least that’s what we like to think, even though sometimes it seems as though that’s all the market is focused on.
Taking a stroll down memory lane, the chart below shows the performance of the S&P 500 in the year leading up to and after the 1994 midterm elections. It’s obviously only a sample size of one, so we would put little weight on it, but in an environment where good news is hard to come by, bulls will take whatever they can get. In the year leading up to the 1994 election, the S&P 500 essentially traded sideways as the markets and economy were pressured by a hawkish Fed and what would be the Orange County bankruptcy, but the year after that midterm election saw the S&P 500 surge 27.1%.
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Daily Sector Snapshot — 11/7/22
Chart of the Day – Cramming for Midterms
Bespoke’s Morning Lineup – 11/7/22 – Quiet Economic Week…With One Exception
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“Our goal has never been to make the most. It’s always been to make the best.” – Tim Cook
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We got past the employment report unscathed on Friday and heading into the new week, the economic calendar is extremely light with one exception. Thursday’s October CPI report will make or break the market for the week. Economists are expecting the headline reading to rise 0.6% m/m and 0.5% on a core basis. We’re past the peak of earnings season, but the cadence will still be busy. Outside of the economy, tomorrow’s midterm elections will likely provide a good amount of sound and fury, and from a market perspective, we can only hope that the results aren’t drawn out for days.
These are the performance numbers for the S&P 500 on the last trading day of the prior seven weeks: -1.72%, -1.51%, -2.80%, -2.37%, +2.37%, 2.46%, and 1.36%, respectively. After these moves, the S&P 500 has now ended the week with a 1% move 29 times this year. As shown in the chart below, since the NYSE moved to the five-trading day week in late 1952, 2022 already has seen the most 1% moves to end a trading week and there are still eight weeks left in the year!
The S&P 500 finished a down week on a positive note last week, but even on the week’s one positive day, the S&P 500 closed lower than it opened (as it did every other day last week). After rallying up to the 50-day moving average during the trading day, the S&P 500 pulled back from its early highs. Futures are indicating a positive open this morning, but in order for a bounce to have any staying power, that 50-day will have to be broken to the upside.
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Bespoke Brunch Reads: 11/6/22
Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.
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Labor Markets
CEO Patrick Collison’s email to Stripe employees by Patrick Collison (Stripe)
Amidst a blizzard of tech layoffs, payments company Stripe unveils a remarkably worker-friendly list of transition policies for fired workers that total about 14% of the labor force. [Link]
A Labor Supply Shock? by Preston Mui (Employ America)
Younger cohorts have almost entirely returned to pre-COVID levels of employment, leaving only the oldest segment of the labor market entirely responsible for the alleged lack of labor supply this year. [Link]
Liminal Spaces
Why One Chinatown Mini-mall Languishes While Another Thrives by Wilfred Chan (Curbed)
Detailed reporting on the magic of cheap rent in Chinatown and the downward spiral of the neighborhood over the past few decades. [Link]
The Eerie Comfort of Liminal Spaces by Jake Pitre (MSN/The Atlantic)
An investigation into why so many people are so enthusiastic for the “strange solace of being on the threshold of monumental change” in picture form. [Link]
Sports
Why is participation in girls’ high school sports — yes, even basketball — waning? by Langston Wertz Jr (Charlotte Observer)
High school sports participation is down sharply, with participation in basketball down 14% over the past decade, to the point that many schools are fielding only a varsity team with no JV squad and no cuts. [Link; soft paywall]
Professional Cornhole Has a Cheating Scandal Called BagGate by John Clarke (WSJ)
The formerly casual pastime has attracted sponsorship dollars and lots of attention, to the point where teams in the national finals were both caught cheating. [Link; paywall]
Traffic James
The Metals for Your EV Are Stuck in a 30-Mile Traffic Jam by Matthew Hill (Bloomberg)
Central African copper mines are tied to the rest of the world with tenuous and often-broken logistics lines that stretch across the southern half of the continent. [Link; soft paywall]
Why Egypt became one of the biggest chokepoints for Internet cables by Matt Burgess (Ars Technica)
Subsea internet cables are critical links for global connectivity with enormous volumes of traffic passing through physical chokepoints like the narrow land route between the Red Sea and Mediterranean. [Link]
China
China’s Local Governments Should Put State Assets to Better Use, Ministry Says by Chen Yikan (Yi Cai Global)
Beijing is starting to push local governments to start selling off assets including houses, land, and cars; other assets like stakes in businesses could also be sold to fund local government deficits. [Link]
Lasers
What it’s like to fire Raytheon’s powerful anti-drone laser by Kelsey D. Atheron (PopSci)
A small four wheeler can hold the 10 kilowatt Raytheon system designed to target and destroy drones on the battlefield. [Link]
Previewing Our Wisconsin Polling Experiment by Nate Cohn (NYT)
In an effort to correct for very low response rates in Wisconsin, the NYT attempted to pay respondents to complete one of its polls this cycle; it’s still not clear yet whether the new approach will prove accurate or not. [Link; soft paywall]
Doom
Hedge-fund giant Elliott warns looming hyperinflation could lead to ‘global societal collapse’ by Anviksha Patel (MarketWatch)
Elliott Management’s strategy is premised on buying assets cheap, so it’s not a surprise that they would be bearish towards overall asset prices. Still, some of the language here is pretty strong stuff. [Link]
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Have a great weekend!
The Bespoke Report — Equity Market Risk Gauge — November 2022
This week’s Bespoke Report newsletter is now available for members.
In this week’s newsletter, we’ve updated our Equity Market Risk Gauge for the month of November, and we also provide a summary of earnings season thus far, highlight downtrends for the mega-caps, check up on market internals, and take a final look at GOP and Democrat odds for the upcoming Mid-Term Elections.
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Daily Sector Snapshot — 11/4/22
On the Other Hand
Harry Truman is famous (among other things) for saying, “Give me a one-handed Economist. All my economists say ‘on hand…’, then ‘but on the other…” And it’s true. You rarely will see an economic analysis that doesn’t couch one view with an alternative scenario, and you can’t fault them for hedging their bets. Predicting the future is impossible, especially when it involves the direction of the world’s largest economy.
This morning’s employment report also has a number of hands. At the surface, the report was better than expected coming in ahead of expectations (261K vs 193K). As shown in the chart below, this was the seventh straight better-than-expected print and the ninth in the last ten months.
To illustrate just how impressive this recent run has been, the chart below shows streaks of better-than-expected prints in non-farm payrolls (NFP). The current streak of seven is easily the longest such streak since at least 2000.
While job growth in the US economy has consistently surpassed expectations this year, it is important to point out that the pace of job growth isn’t accelerating. This month’s print of 261K was actually the smallest monthly increase since late 2020 and is well off the peak readings seen in 2021 when the FOMC was maintaining its zero interest rate policy. To put this trend in perspective, in 2021 the average monthly change in NFP was 562K. In 2022, that average has declined to 407K, and in just the last three months, the average has been 289K. On the one hand, the job market remains strong. On the other hand, momentum has clearly peaked and there has been a trend of deceleration. Click here to learn more about Bespoke’s premium stock market research service.
