The National Federation of Independent Business (NFIB) released its August report surveying small business owners on their views of their business and the economy. The NFIB index reading came in a little below the previous month at 90.8. The index is hovering at upward levels following the Great Recession after confidence plunged by small business owners in 2008.
Not surprisingly, with the low level of small business confidence as reported by NFIB, the SP600, small-cap index, and SP 400, mid-cap index, are significantly trailing the SP500 and NASDAQ. Below are the returns YTD through October 9, 2023, of the four indices, with the small-cap index now in the negative YTD:
As we have mentioned in previous Weekly Briefs, it is common for the indices to be in out of sync with each other as investors favor one sector over another for periods of time. Since January 2020, small and mid-cap indices have been out of favor with institutional investors. Since the start of the pandemic, the small and mid-cap indices have significantly trailed NASDAQ, the best performing index of this group, and the SP 500 large cap sector. Although a cumulative return of 21.26% for the past three years for small cap index is not terrible, it is less than half the returns of the NASDAQ. Below are the returns for these indices since January 1, 2020:
The stock market bottomed on October 12, 2022, from the correction that started on January 1, 2022. After a strong rebound, the major indices peaked on July 31 this year, and the momentum has since stalled. This stall has appeared to have reversed since October 3, and now the SP 500 has rallied above its 20-day and 50-50-day moving Averages. The recent positive trend that started last week has surprisingly not been upset by the horrific conflicts in Israel with positive days since the outbreak.
What Does It Mean To Me?
It is understandable for the small and mid-cap sectors to be training the NASDAQ and large-cap sectors during times of unprecedented world challenges, followed by the Federal Reserve's aggressive rate hike campaign to slow inflation. It is hard enough to run a successful business and harder when small and mid-sized businesses have limited resources, inflation, and rising credit costs. There will be a time when the small and mid-cap sectors will outperform the large-cap sector. I would suggest that time is still a year or more away, but historically, there are always reversals of leadership between these three sectors.
The good news is the SP500 has rallied this past week and recovered above its 20, 50, and 200-day Moving Averages (DMA). The proof of a sustainable positive trend is staying above these averages with more positive days than negative. Earning season for the third quarter starts and will give investors an insight into the health of businesses and the economy. Meanwhile, pressure mounts for the Federal Reserve to not hike rates in risk of a recession and potentially begin reducing rates in 2024.
We remain favorable on the US stock market and economy. We have maintained the underweighting of small and mid-cap sectors since 2020 in our model portfolios as they continue to remain well below positive technical indicators. We maintain our overweighting to large cap and technology in our model portfolios.
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