NFIB conservatives grudgingly turn bullish

Investors received some data points today that is highly revealing about the economy. The most important was the NFIB small business survey. Small business sentiment is especially important as they have little bargaining power and they are therefore sensitive barometers of the economy. The other is the March JOLTS report of labor market conditions, which is a little dated but nevertheless revealing.

Small business owners tend to be small c-conservatives, and their political leanings tilt Republican. We can see that optimism fell in the wake of the election when Biden and the Democrats took control. What is remarkable is the uptick in optimism despite the leftward drift in government policy.



This is a strong indication of economic strength.



More NFIB details

It’s no wonder why optimism rose. Sales have strongly recovered.



The NFIB survey also tells the familiar story of supply chain bottlenecks. Inventories are too low. 



The supply chain squeeze is confirmed by the difference in ISM backlog and inventories. Backlogs are rising, while inventories are low.  There is, however, a silver lining in that dark cloud. Expect a couple of quarters of inventory accumulation when the supply chain problems are resolved. That translates into a global manufacturing boom.



What about prices and the labor shortage? There are widespread anecdotal reports of businesses experiencing difficulty in hiring. It appears that price pressures are stronger than compensation pressures. I interpret this to mean that small business are able to pass on their cost increases. 



The good news is sales are rising and margins don’t appear to be under pressure. The open question is how transitory these inflationary pressures are.



JOLTS: A strong labor market

The March JOLTS report confirms the March NFP survey of a strong labor market. The headline job openings were strong. More importantly, quits are rising, which is consistent with the April NFP report of rising job leavers.



The strength in quits can be explained by the combination of a strong labor market and a backlog of “pent-up resignations”, as reported by Bloomberg:


Ready to say adios to your job? You’re not alone. “The great resignation is coming,” says Anthony Klotz, an associate professor of management at Texas A&M University who’s studied the exits of hundreds of workers. “When there’s uncertainty, people tend to stay put, so there are pent-up resignations that didn’t happen over the past year.” The numbers are multiplied, he says, by the many pandemic-related epiphanies—about family time, remote work, commuting, passion projects, life and death, and what it all means—that can make people turn their back on the 9-to-5 office grind. We asked Klotz what to expect as the great resignation picks up speed.



A “Not Enough” recovery

Putting it all together, this is a “not enough” recovery, as characterized by Myles Udland at Yahoo Finance:

The post-crisis economy was about too much — too much debt, too much housing, too much interdependence, too much, too much, too much. 


The post-pandemic economy is taking shape as one in which there is not enough — not enough housing, not enough workers, not enough cars, chlorine, or crypto. 


And this inversion of what is driving this cycle can help explain what we’re seeing from the labor market to the housing market to the stock market and beyond. And perhaps helps make sense of why everyone — professional investors, the general public, politicians, and so on — seems perplexed by today’s state of affairs.  
Fed governor Lael Brainard spoke today, and she is not overly worried about transitory inflation pressures from supply chain bottlenecks:


To the extent that supply chain congestion and other reopening frictions are transitory, they are unlikely to generate persistently higher inflation on their own. A persistent material increase in inflation would require not just that wages or prices increase for a period after reopening, but also a broad expectation that they will continue to increase at a persistently higher pace. A limited period of pandemic-related price increases is unlikely to durably change inflation dynamics.

The Fed is sticking with its story that it will “monitor incoming data”, but policy is going to stay accommodative for the time being.

I will remain attentive to the risk that what seem like transitory inflationary pressures could prove persistent as I closely monitor the incoming data. Should this risk manifest, we have the tools and the experience to gently guide inflation back to our target. No one should doubt our commitment to do so.

But recent experience suggests we should not lightly dismiss the risk on the other side. Achieving our inflation goal requires firmly anchoring inflation expectations at 2 percent. Following the reopening, there will need to be strong underlying momentum to reach the outcomes in our forward guidance. Remaining patient through the transitory surge associated with reopening will help ensure that the underlying economic momentum that will be needed to reach our goals as some current tailwinds shift to headwinds is not curtailed by a premature tightening of financial conditions.

In conclusion, we have a booming economy and signs that the strong recovery will persist for the next few quarters. The Fed is accommodative. Inflation and labor cost pressures should be transitory. With the exception of the semiconductors, which look a little wobbly, investors should stay long the cyclical trade.




32 thoughts on “NFIB conservatives grudgingly turn bullish

  1. Current $SPX decline may have a way to go before it bottoms out. $SPX is s still well above its 50 day ma. The 5 day RSI has not dropped below 30 into oversold territory. Also, at other recent pullback lows, daily volume appears to have peaked at over 3 billion shares traded at or near the bottom. Yesterday’s volume was 2.43 billion shares.

  2. Excellent report Cam. The Small business confidence portrays well for the US economy and your conclusion that these small business owners are confident because of uptick in business confidence shows an economy humming on well. After all 90% US business is small business.

  3. Premarket:

    Closing NIO +1.8%
    Closing PLTR +2.9%
    Closing VIAC +0.9%
    Closing XLE +0.6%

    Taking gains where I can.

    1. Adding back to a few positions.

      My thinking (or my hope) is that the Naz has experienced enough damage over the past few days to support a ST bounce.

      1. If the QQQ volume today is over 75 million shares, I’d tend to agree with you. There’s a good chance of that happening as it’s only 11 AM and volume for QQQ is already over 25 Million shares

    2. There are two strategic moves going for me – position sizing and the fact that I’m trading mainly broad sector ETFs.

    3. The dip below 4100 + recovery above should relieve some of the selling pressure. If we close below 4100 then it’s likely we’re headed much lower.

    4. The SPX is headed for another breach of 4100.

      That does it for me.

      Out of all positions here. We all need an exit plan, and IMO diving below 4100 a second time is a bad omen.

      1. 50 day ma is at 4050.7. A close below that might open the floodgates.

  4. 50 day ma is at 4050.7. A close below that might open the floodgates.

    1. Now that I’m out, I’m all for it.

      Base case scenario is still the selloff that Cam’s expecting.

      I tried to game a ST snapback rally and paid the price.

        1. I have a rule against shorting. I categorically avoid it. I’ve learned from experience that it requires the kind of mental perspective that I’m just not good at.

    1. OK, good luck.

      All significant corrections begin this way. And of course, all false breakdowns begin this way as well. It just feels closer to the real deal this time.

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