Another Improvement In Small Business Confidence
Small business confidence in the NFIB report rose from 100.2 to 104 which beat estimates for 100.9 and the highest estimate which was 102. We’ve basically recovered all the losses from the recession as the top chart shows. Every indicator except one increased in the September reading. Expected credit conditions fell 1 point to -5%.
The biggest improvement was in earnings conditions which rose 8 points to -12%. 2nd best increase was in the net percentage expecting the economy to improve. That was up 8 points to 32%. Net expecting real sales to be higher and the net plans to increase inventories were both up 5 points to 8% and 11%.
As you can see from the bottom chart, hiring plans are actually better than before the recession. This survey likely doesn't perfectly represent small businesses who are struggling, but we'd all rather see it up than down.
Same Store Sales Growth Falls Slightly
No stimulus is coming as Nancy Pelosi rejected the $1.8 trillion bill the White House offered. Her interview on CNN on Tuesday which explained why she didn’t compromise went viral on social media. If she sees this as making her look bad, she might change her mind. It’s ironic that her explanation on why she won’t come off her $2.2 trillion plan actually makes a deal more likely.
If this is a political game, she could support the plan to see if the GOP Senate actually votes for it. In my opinion, it’s good politics to support the plan because the GOP could struggle with getting enough votes. Obviously, it’s also good policy to get checks to people and small businesses who are struggling. The stock market can handle waiting a few more weeks, but people can’t.
We got a small glimpse of how the consumer could look without help in the Redbook same store sales report. By the way, the Trump plan calls for $400 in weekly unemployment benefits and $1,200 checks. Redbook same store sales growth in the week of October 10th fell from 2.1% to 1.2%.
That’s not a huge decline, but it’s a continuation of the very slow growth trend. A stimulus would instantly boost spending growth to the mid single digits for a few months until COVID-19 is fully under control.
Contested Election?
Average of recent battleground polls (likely highly biased) shows Biden up by 5 points. With record mail-in voting, apparently some still are worried about a contested election. The bigger the victory in either direction, the less likely there will be any uncertainty about who won.
As you can see from the chart below, the fund manager survey shows over 60% of investors think there will be a contested election. Many don’t think that will be the case. Obviously, anything is possible, but most wouldn’t bet on a contested election, or hedge positions as the market is sufficiently worried about this possibility.
Marginal Change In Inflation
September CPI report barely changed from last month. Yearly headline CPI was up from 1.3% to 1.4% and core CPI was flat at 1.7% as the chart below shows. This obviously won’t make the Fed hike rates. Fed is many months away from even discussing the possibility of rate hikes.
Earliest many see a rate high is 2022. It's unlikely that this report moves growth stocks or the 10 year yield. The market should anticipate changes to inflation. But sometimes inflation reports move them. Obviously, these numbers won’t do anything.
Food inflation was high as it was 3.9%. It was driven by both categories as food away from home inflation was 3.8% and food and home inflation was 4.1%. A gap between the two closed potentially because more people are eating out. Once again, meats, poultry, fish, and eggs led the charge as their inflation was 6.3%. Limited services meals had 5.5% inflation which makes sense because it’s tough to have fine dining in the COVID-19 world.
Energy inflation was -7.7%. Negative inflation is unlikely to last much longer. We’ve seen a massive cut in oil production. Production won’t rise right after prices increase because there is no access to funding. Many of the smaller energy producers have gone bust. This is the worst energy market in history which is why prices will eventually rise. If a stimulus is passed within the next few months and COVID-19 therapeutics come out soon, demand for oil will spike.
Within core inflation, commodities inflation wasn’t near zero for a change as it was 1%. Core services inflation was 1.9%. Shelter inflation actually fell to 2% which explains why core CPI was weak. Even though this is the strongest housing market since the 2000s, shelter inflation was the lowest since February 2012. That must be because of rents since CPI doesn’t actually cover changes to home prices. Medical care services inflation was 4.9% and transportation services inflation was -5.1%.
New York Is In Trouble
New York is underperforming the rest of the country because of draconian economic restrictions. However, it would look bad politically if the virus gets out of hand like it did in March and April. Deaths won’t ever reach that level again though unless the virus mutates. As investors, we react to the trends and rules.
As you can see from the chart above, it’s time to avoid NYC until its regulations are normalized. Economic activity in NYC as a percent of pre-recession levels is below the national rate in every category. Biggest difference is in large retailers. Worst decline in NYC is in hotels. That’s a 70% decline from normal activity. NYC might be one of the last areas to lift restrictions when COVID-19 is fully under control.
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