Small Businesses Optimistic
Even though it seems impossible, the small business optimism increased even more in the most recent report. As you can see from the chart below, the index was up 0.7 points to 107.6. The improvements came because of the tax cuts and the improvement to the regulatory situation. We often hear about how optimism is bad, but that’s really only the case for stock investors getting euphoric. If stock investors are euphoric, they push stock valuations too high, making it a bad time to invest. If small businesses are euphoric, then they hire more workers and invest more in their businesses. I fail to see why that’s a bad signal. Furthermore, the stock returns after previous NFIB peaks bear that out as the S&P 500 is up 9.7% in the following year on average after its peak.
It’s interesting to see how much more press coverage the tariffs get compared to deregulation. Trump issued the fewest significant regulations since 1982. The reason it’s easy to cover the tariffs is because it’s simpler policy than individual regulations. Obviously, negative stories sell better. Few people understand the importance of limiting Dodd-Frank, but there’s bipartisan momentum in Congress to go through with it. This will help small banks. It looks like the 86% rally in the KBW small bank ETF in the past 13 months was justified. It would be easier to buy stocks if the headlines about this new deregulation were positive. The good news is the headlines make others sell, giving you a better price to buy.
Labor Force Participation Rate
The most important stat in the labor market is the labor force participation rate because the workers who have gotten out of the labor market will be getting back into it. If they don’t come back, then there’s no question wage growth will accelerate this year because the unemployment rate is low. The chart below shows the labor force participation rate for each age group. As you can see, the percentage of teenagers working has fallen by 32.5% since 2000. Even since the recession, the participation rate has barely increased. In the past 20 years, it has become more necessary to get a college degree. This is a generational problem because teenagers have less savings to pay for college. Tuition and book prices have increased astronomically and starting wages are similar to what they were in previous generations. Even those who are 20-24 only have a participation rate of 71.7% which is down 8.4% from 2000. Some of the young workers have been replaced by older workers as the participation rate for those over 65 has increased 53.6%.