Stock investors looking for insights into the prospects for growth in the U.S. economy usually concentrate on hard data like job and wage, unemployment rates, the producer and consumer price indexes and the like.
But a news story about the state of mind of the small-business community in the U.S. should be front and center in the mind of anyone who wants a glimpse of the future. And savvy growth stock investors are always on the lookout for news they can use.
Every month, a trade group called the National Federation of Independent Business (NFIB) does a survey of small business owners and publishes the results as the Index of Small Business Optimism. And the latest release of the Index shows it jumping by 7.4 points to 105.8, which is the highest level since 2004.
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Coming on the heels of 3.5 points in November and 0.8% in October, the trend of improvement in the Optimism Index is pretty convincing. It’s clear that small business owners feel pretty good about the way the U.S. Presidential election turned out.
To go along with the Optimism Index, the survey also showed that 50% of the firms being surveyed expected the economy to improve, up from just 12% in November.
Economists see optimism indexes as a leading indicator of capital expenditures, although capex hasn’t actually moved yet.
If you add in one more economic tidbit, you can get a good picture of the state of play for small businesses. Last week’s report by the NFIB about hiring (which also hasn’t picked up), revealed that small businesses are having a hard time finding qualified workers, so hiring hasn’t turned up.
When there are jobs that aren’t finding qualified workers, the result is usually upward pressure on wages, as businesses up the ante to compete for available workers. And rising wages are good for the health of the economy, as more money in circulation powers growth from the bottom up.
So what should stock investors be looking for from this big uptick in small-business optimism?
First, be on the lookout for increased mergers & acquisitions activity as established businesses snap up the intellectual capital, talented staff and ambitious founders of small businesses that have shown real promise.
Second, watch for an increase in the number of small companies coming public with initial stock offerings. Optimistic businesses need capital to grow, and they won’t all find private equity investors like the cast of Shark Tank. So coming public, while it’s a lot of work and takes time, is the final product of optimism in the small-business community.
Growth stock investors who like to fish in the small-cap stock end of the pond should be paying close attention to IPO activity over the next year or two. Optimism makes things happen, and new public offerings, which peaked at 363 in 2014, dipped to 234 IPOs in 2015 and fell to a seven-year low of 128 in 2016.
A surge of new IPOs would restock the pond for everyone, but small-cap devotees like Tyler Laundon of Cabot Small Cap Confidential will be especially tickled. You can learn more about the advisory by clicking here.
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