U.S. stocks gained some ground on Tuesday amid growing optimism an improving economy will justify an extension of the year-long market rally, or so it was written by the financial press.  Stocks were considerably higher for most of the session, but slid to negative territory late in the day before bouncing back above the cutline 25 minutes ahead of the closing bell.

As stocks grind higher and attempt to break past the near-term highs hit in January, the latest NFIB small business survey illustrated that small biz owners are not so ebullient about things and the IBD Economic Optimism reading for March suggested that things are not quite right with the world.  Both surveys fell.  The NFIB survey remains stuck at a level that’s well below the marks hit during the past two economic contractions and the Personal Financial Outlook segment of the IBD survey fell to the lowest level since February 2009 – a period when everything but the safest of assets was getting hammered.  More on the NFIB report below the jump.

News from Cisco Systems that they’ll roll out a heavy-duty router capable of 12 times the capacity of rival equipment helped boost information technology and telecom shares.  The router will allow internet providers to carry data traffic at speeds 100 times faster than most home connections today and able to direct traffic based on the priority of the data – this thing is all about video. 

Basic material, utility and consumer staples stocks were among the session losers.

The dollar rallied after Fitch Ratings warned about deteriorating credit quality In Europe, which prompted traders to seek refuge in the greenback as they sold euros and pounds. 

Market Activity for March 9, 2010

Anniversaries

The S&P 500 has regained all but 0.85% of the 8.1% dip from a couple of weeks back, a pullback that was triggered by heightened concerns over sovereign-debt default in Europe.  That worry has abated, not totally but traders are not currently focused on the situation at least in terms of running for safety.  Since the S&P 500 hit its 13-year low one year ago yesterday, the index has jumped nearly 69% -- recouping 52% of the losses from the October 9, 2007 all-time high of 1565. 

So today marks the one-year rise from the wicked depths of S&P 500 666, but it is the date of another historic level: the 10-year anni of the NASDAQ Composite’s all-time high.  On March 10, 2000, the tech-laden index hit 5,048.  Two months later the NASDAQ had fallen to 3,360 and by October 2002 it bottomed out at 1,115.  Today it still sits at less than half that high-water mark. 

While those who chased the tech bubble were hating it, I recall a fabulous opportunity to buy diversified manufacturing, defense, energy and consumer-staple stocks as investors had ignored these areas because they weren’t going to make anyone quickly rich.  Obviously, the tech names didn’t quite live up to that hope either.  Of course, nothing in the equity markets have lived up to even normal returns over the past decade, but those other areas offered very reasonable entry points and 10-years from now it is very likely the annualized returns will be substantial. 

Unfortunately, sometimes the stock-market investor has to wait 20 years for the return on riskier assets to fully materialize.  To quote Emily Dickinson: “Luck is not chance, it’s toil; fortune’s expensive smile is earned.”  The same holds true for investing.  There are no ways to make yourself rich overnight, not without taking on a level of risk that can ruin you.  Achieving 7-8% real annual returns on investment is an exercise in toil as well.

NFIB Small Business Survey

The National Federation of Independent Business reported that their small business confidence reading fell to 88.0 for February from January’s 89.3.  We’ve been watching for this figure to rise above 90, which is still a depressed level but the measure has never been stuck below this market for so long (currently 17 months) in the survey’s 34-year history.  (The cycle-low of 81.0 was hit in March 2009 and the all-time low of 80.1 was hit in April 1980.) 

Among the survey’s internal readings, a plunge in the “expect a better economy” figure did the most damage to the overall reading for February at it dropped to a net negative 9% from a net positive 1% in the previous month.  As a result, firms don’t expect higher sales over the next six months – that measure fell to 0 from 3%.  And if firms don’t have much confidence in new sales (a net negative 9% expect business conditions to improve over the next six months, down 10 points from January), then they’re not going to increase capital spending to the point that this economy desperately needs to sustain this recovery past four-five quarters.  The “plans to increase capital spending” reading remained at 20%, which is quite a ways below the longer-term average of 30%.  (These percentages are based on the positive or negative answers to question from the survey’s respondents.)

And this sentiment flows into the inventory and hiring plans among small business – small firms have accounted for 60% of U.S. job growth over the past two decades. 

Small business owners continued to liquidate inventories, a net negative 18% of all owners reported gain in inventory stocks – an improvement from last year by still a depressed level. 

The “plan to hire” figure remained unchanged from the previous month at -1% -- the longer-term average is 11.9%.  A negative percentage simply means that more firms plan to cut jobs than plan to add.  The pace of layoffs did slow but the employment “gains will be painfully slow,” according to NFIB.

This survey, which has a pretty substantial sample size of 3,938 small-business owners, shows that small firms have “not caught the wave,” according to NFIB, of positive economic growth over the past two quarters.  Roughly two-thirds of the 5.9% GDP print for the fourth quarter was due to inventory reduction (very much helped by autos as  five million cars were produced but nine million were sold).  It seems production will have to ramp up for several more months before it flows into a sales trend among small businesses that brings the collective confidence to a point that engenders spending and hiring. 

One also has to think that policy, and the uncertainty over the direction of future policy, are also having an effect on the small business owners.  If you don’t know the degree to which regulations, tax rates and the cost of providing health insurance to your employees will change, then you’re not going to step out and put a bunch of sacred capital/cash on the line.  Government rarely understands this. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900