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Market Insights: Business Confidence = Growth

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Business Confidence = Growth

Earlier this week we posted an article through our Milestone Facebook page and individual LinkedIn channels about the latest NFIB Small Business Optimism Index. This is a widely followed index that is compiled from a survey that is conducted each month by the members of the National Federation of Independent Business (NFIB). If you wish to see posts like this through your Facebook, just follow our page. 

Why do investors care about this index? Small businesses are responsible for a majority of new job creation and the NFIB focuses on this sector of the economy. The direction of the health of small businesses can portend changes in the stock market - especially small capitalization companies. The latest reading for May, released on Tuesday, came in at 107.80 which is the second highest level in the 45-year history of the survey and the highest in 34 years when it hit 108 in July 1983 (see chart below). This is rather significant in our view as that was not long after the beginning of a long secular bull market that ran from 1982 to 2000. 

In addition to small businesses, consumers have also been exhibiting strong confidence towards their personal household situations. The widely followed Conference Board Consumer Confidence Index® remains near cycle highs, and the latest May reading came with a 17-year high in the Present Situation Index (subcomponent). 

The confidence is also prevalent with large businesses. The Conference Board CEO Confidence Index is off of its highs, but still remains firmly planted in expansion territory.

This consumer and business confidence, coupled with very strong US earnings growth projected to be 22% for 2018 and further growth expected entering 2019, demonstrates the power of this secular bull market which in our view has nowhere near run its course. As we have noted many times in previous posts, the stock market is most closely correlated to the direction of earnings growth. In fact, over the last 35 years, the correlation of the S&P 500 operating earnings per share has a monthly correlation of 0.936 with the S&P 500 Index. This is really not that far off from perfect correlation (a level of 1).

In summary, although we continue to see volatility and geopolitical risk on the intermediate-term horizon, our view remains that this should be seen as an opportunity.

                                            Source: National Federation of Independent Business (NFIB)