The most important problems section of this month’s NFIB report on small businesses showed one clear problem: labor.  A combined 40% of businesses reported either cost or quality of labor as their single most pressing issue.  While the percentage of respondents stating the quality of labor as the biggest issue went unchanged at 28%, there was a record one-month increase in the percentage of firms stating costs were their biggest problem. The percent reporting cost of labor as their biggest issue rose 4 percentage points to a record high of 12%.

While a massive share of respondents reported either cost or quality of labor as their biggest issue, the next largest share sees government-related issues as the biggest concern.  A combined 28% reported either taxes or government requirements & red tape as their most important problems which is actually a muted share on a historical basis.  Even though it was up 1 percentage point to 17% in September, the percentage reporting taxes as their biggest problem sits in the bottom decile of the historical range and the reading on government requirements and red tape sits in the 15th percentile.

As for the other readings, Poor Sales, Competition from Big Business, and Financial & Interest Rate concerns are at record lows.  While not at a record low, the Cost/Availability of Insurance fell by a record amount. Inflation also experienced a historic drop of 3 percentage points in September. With that said, 10% of owners still reported that as their biggest problem which is still in the top 5% of all readings. The single biggest gainer in September was “Other”. This category is not as old as the other problems but the 7 percentage point surge was a record jump in a single month and leaves the reading at one of the highest levels to date.   Click here to view Bespoke’s premium membership options.

Small business optimism measured through the NFIB’s monthly survey dipped in September by a full point to a six-month low of 99.1.  That is in the middle of the pandemic range as small business sentiment never quite fully recovered to pre-pandemic levels let alone its August 2018 record high.

Breadth in this month’s report was mixed perhaps leaning slightly more negative with nine categories falling month over month while seven were higher. Another three went unchanged.  The largest declines were for plans to increase employment and expectations for the economy to improve.  While those were the two biggest decliners, they are coming from polar opposites of their respective ranges.  The index tracking plans to increase employment remains in the top 2% of readings even after the six-point decline that ranks in the bottom 2% of all monthly moves.  Meanwhile, the magnitude of the decline in the index for expectations for the economy to Improve ranks in the 20th percentile of all other monthly readings, but that leaves it just off of a record low. In other words, readings throughout the report are nuanced with some at or near record highs and others at or near record lows.

As previously mentioned, Outlook for General Business Conditions plummeted in September showing that a net -33% of reporting owners foresee better business conditions in six months.  The only two months with weaker readings on record were November and December of 2012 just after President Obama’s re-election. Given that weak reading, the number of firms that see now as a good time to expand remains muted with this month’s reading unchanged at 11 which is short of the bottom quartile of the historical range.  Actual sales changes improved back to a positive reading that sits in the middle of its range. Sales Expectations also improved to positive territory, but that reading is far lower with respect to its historic range. Earnings changes also improved as fewer businesses reported higher prices although that reading remains well above any other period in the history of the report.

In today’s Morning Lineup, we discussed some of the price and labor pressures evident in the report.  Revisiting these, firms continue to show strong albeit slowing labor demand as hiring plans remain elevated but dropping sharply month over month.  Meanwhile, Actual Employment Changes rose sharply, though, this reading remains negative. Additionally, firms have continued to raise compensation and plan to continue to do so as a record number reported that openings are hard to fill.

Not only did plans for employment fall but so too did capital expenditure plans as well as actual capital expenditures.  Inventory levels are also abating to a degree as fewer—but still a historically high share—report current inventory levels are too low. There was also a 2 point pullback to 9 in the net percent of businesses looking to increase inventory plans. Click here to view Bespoke’s premium membership options.

In January of this year, we looked at the relative performance of the United States versus the rest of the world (ROW). At the time, ROW was making up lost ground relative to the US, but that didn’t last long. Through the first three quarters of 2021, the US (SPDR S&P 500 ETF-SPY) picked up steam once again and has significantly outpaced both the rest of the world (Vanguard FTSE All-World ex-US ETF- VEU) and emerging markets (iShares MSCI Emerging Markets ETF- EEM). Emerging markets have been the underperformers of the group while the US has led. Although EEM outperformed at the beginning of 2021, the index has since moved lower while the US trudged higher right up through early September. YTD through the end of Q3, SPY has outperformed EEM by 19.5 percentage points, which ranks as the second-widest spread between the two ETFs since EEM started trading in 2004. While not to the same degree, the US has also notably outperformed the rest of the world as well with a performance gap of 12.4 percentage points.

Over the last 17 years, Q4 performance has been mixed after the performance spread between SPY and EEM during the first three quarters of the year was in the double digits. Since 2004, there have been five prior occurrences, and in three of those years, SPY continued to outperform in Q4 while it lagged twice. Over the last decade, EEM has only outperformed SPY two times through the end of Q3 (2016 and 2017), and this year is the fourth in a row where SPY outperformed EEM.

Similar to EEM, SPY has also steadily outperformed VEU in the first three quarters of the year with outperformance in 11 of the last 14 years. Interestingly, in the three years where SPY lagged VEU, it outperformed in Q4 all three times. Like this year, SPY outperformed VEU by double-digit percentages in the first three quarters of the year only three other times since 2008. The last two times there was a positive double-digit spread (2018 and 2020), VEU outperformed for the remainder of the year.

Investors often look to play trends in the first three quarters of the year for a continuation through Q4 or a reversion to the mean.  However, in terms of big performance gaps between US stocks and both international and emerging markets in the first three quarters of the year, like the analysis we highlighted last week with sectors, historically there’s been no discernible trend of either a continuation or reversal of that trend in Q4. Click here to view Bespoke’s premium membership options.