This morning’s only economic report was the NFIB’s Small Business Optimism Index. It came in weaker than expected, falling to 98.2 versus forecasts of 98.3.  The index has now fallen in back-to-back months as it hovers in the 40th percentile of its historical range..

Of the inputs to the headline number, breadth was actually mixed with four declining categories, four rising, and the remainder going unchanged. As for the non-input categories, breadth was far weaker, with only two indices avoiding declines. As for those that did drop, there were a handful that saw bottom decile monthly declines.

Of the inputs to the headline number, the most concerning decline was in actual earnings changes. That index fell 9 points MoM, which ranks as the sixth largest monthly decline in the index’s history (data going back to 1986). Given that those are bottom-line changes, the cause for weaker earnings could be weaker revenues, higher costs, or a mix of both. However, weaker revenues appear to be the culprit.

For starters, the index for higher prices remains in the top quintile of readings throughout the survey’s history, but there was a 3-point decline in October. Meanwhile, the index for actual sales changes (not an input into the overall optimism index) fell by a more significant 6 points in October to the lowest level since May.  That six-point decline ranks in the 6th percentile of monthly moves, and the current level of the index is now in the bottom decile of historical readings. Interestingly, despite the moves in those indices, the share of respondents who reported poor sales as their biggest problem was unchanged at 10%.

One bright spot of the October report concerned financing.  As rates have continued to fall, there has been an uptick in capex plans and expected credit conditions. For the latter, the 4-point jump month-over-month was one of the largest one-month increases on record, and current levels are also at the high end of the past few decades’ range.

As noted earlier, for the topics labeled as small businesses’ biggest problems, poor sales didn’t move in October, and at 10% it ranks as the fourth-biggest issue of the 10 listed. Ahead of poor sales, inflation took a step back, falling 2 percentage points to 12% of responses, and taxes fell an identical amount to 16% of responses.  The single most commonly reported problem in October was quality of labor. Of responding firms, 27% reported this as the biggest issue. In spite of other weak indicators concerning labor markets, that was the strongest reading since November 2021 and was up significantly from September. In fact, the 9 percentage point jump marked a record monthly gain.  What’s more, the share reporting cost of labor as the biggest issue actually fell 3 percentage points to 8%.

Normally, on a day when the S&P 500 rallies more than 1%, you would expect to see most stocks trading higher along with it, but if there’s one group that seems to lag the market every day lately, it’s the homebuilders. Right on cue, the group’s performance today trails the overall market so much so that the iShares Home Construction ETF (ITB) is down on the day, just like it’s down on the year as well.

It’s been a painful year for homebuilders. You have to go back nearly a full year to find the sector’s 52-week high, and from that peak in late November last year through the tariff-tantrum low, ITB plunged over 30%. Through late August, the sector erased most of its prior losses, but it has been a painful fall as Americans remain locked in their current homes because of low-rate mortgages, and most prospective buyers don’t have anywhere near enough money to afford a starter home. This is why the average first-time homebuyer is now a record 40 years old. As shown below, ITB remains stuck in a steep short-term downtrend, below its 200-DMA and much closer to 52-week lows than highs.

It’s been a bad year for homebuilders, but the underperformance versus the market isn’t anything new. The year’s not over yet, but last year, ITB underperformed SPY by an even larger amount than it has YTD. In 2018, ITB underperformed by close to 25 percentage points, and back in 2007, the performance spread was over 60 percentage points in favor of the S&P 500.

Looking at the performance of the ten largest holdings in ITB, YTD returns have been mixed. As its name suggests, ITB is a home construction ETF, so it’s not just made up of homebuilder stocks. Of the top ten holdings, only five stocks would be considered pure-play homebuilders, and only two of them – NVR and Lennar – are down YTD. The worst performing stock of the group has been Lennox International (LII) with a decline of close to 20% YTD, while TopBuild (BLD), another non-homebuilder company, has rallied over 35%.  It’s also the only stock listed that has managed to outperform the S&P 500.

Overall, six of the ten stocks shown are oversold, and all but BLD are below their 50-DMAs. For much of the last year, investors in the homebuilding space would say that lower rates would provide a tailwind for the sector. This year, though, the 10-year yield has declined from a peak of 4.8% in January to 4.1% now, and yet homebuilders haven’t been able to get out of their own way.

Not a Bespoke client?  We’d love for you to give our equity research platform, Bespoke Premium, a try.  You can sign up for complimentary access for 14 days at this link to start receiving our daily emails today!

Welcome to Bespoke Brunch Reads — a linkfest of some of our favorite articles 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.

Continue reading our weekly Brunch Reads linkfest by logging in if you’re already a member or signing up for a trial to one of our two membership levels shown below!  You can cancel at any time.