Rising COVID-19 cases and concern about the policy environment put a dent in small business optimism in the month of December, the index’s second straight monthly decline. As shown in the LPL Chart of the Day, the National Federation of Independent Business (NFIB) Small Business Optimism Index, a survey of more than 500 firms, declined in December to 95.9, falling below the long-term average index value since 1973 of 98. Further, 9 of the 10 index components declined, while only one—satisfaction with current inventory—managed to improve.
The rise in COVID-19 cases in the fourth quarter of 2020 and the subsequent rise in restrictions implemented by state and local governments have taken a toll particularly on small businesses, pushing the Uncertainty Index component of the survey 8 points below the 6-month average. Meanwhile, the rise in COVID-19 cases has coincided with the election of a new administration in Washington, DC, and the potential regulatory and tax changes that may come with it, adding further uncertainty.
“Small businesses are rightfully concerned about their business outlook as new COVID-19 cases continue to surge,” noted LPL Chief Market Strategist Ryan Detrick. “The widespread vaccine distribution should be the key to lifting us out of the pandemic; however, local restrictions used as a bridge during the rollout of the vaccine will create a tough environment for small businesses.”
While survey data has suggested a tough economic environment, the stock market has been signaling this uncertainty may be short-lived, at least for publicly traded small cap stocks. As of January 12, 2021, the Russell 2000 Index of small cap stocks has handily outperformed its large cap counterpart, the S&P 500 Index, by nearly 11%. In Weekly Market Commentary: Market Policy Projections for 2021, we explain that the increased prospects for additional fiscal stimulus may encourage rotation toward areas of the market that may respond positively to economic reopening, which includes small cap stocks.
Even though small cap stocks—and perhaps the broader market—could be due for a breather after such a strong post-election rally, we think the future for small caps is brighter than the survey results may be suggesting.
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