The Bull Thread

Small Business Sentiment Wild Ride
Tue, Feb 11, 2025

This morning was light for economic data with the only release of note being the NFIB's Small Business Optimism index. The headline number was expected to pull back following the post election surge, but the decline was larger than expected as it came in at 102.8 versus forecasts of 104.7. That being said, as shown in the chart below, small business sentiment is still up huge since last November's election.



In the table below, we show the readings across the report's sub-indices for January and December, the month over month change, and how those all rank as a percentile of all periods. As shown, the Optimism Index's decline in January was actually quite large falling in the bottom decile of all months' moves. Playing into that were bottom decile declines in a number of inputs like: inventory plans, expected credit conditions, viewing now as a good time to expand, and capital outlay plans. For that last category, the 7-point drop was actually a record single month decline. That is also only one indicator of a number that point to softening capex and labor market conditions which we discussed in today's Morning Lineup.



As shown in the table above, breadth in January was weak on the whole. For all categories (both inputs and non-inputs for the headline index), there were ten indices that fell month over month versus six that rose while another two were unchanged. Looking at the decliners, most of the categories are expectation or plans based. Contrary to that weakness in soft data, hard data indices like actual earnings and employment changes were generally the ones that improved versus December.

In the charts below, we create indices tracking the strength of hard and soft data categories in the report. Following the election, the soft data index soared as expectations and optimism massively improved given small business sentiment has a tendency to favor Republicans. The historically strong readings in that index left more muted hard data in the dust. With that said, January saw the soft data index revert lower although it is still at solid levels in the 63rd percentile of readings. Meanwhile, hard data has continued to improve and is now at the highest level since September 2023.



Again, although the January report showed some moderation in small business optimism, reporting firms are still extremely optimistic. For example, the index of Outlook for General Business Conditions pulled back but remains in the top 2% of readings in the survey's history. Likewise, the share of respondents reporting now as a good time to expand is around some of the highest levels of the past few years.



The NFIB offers a breakdown of reasons given for expansion outlooks. As shown in the second chart below, the strength in positive expansion outlooks has been largely driven by politics. Similarly, those giving uncertain outlooks have less frequently been pointing the finger at politics, however, there was an identical share in January that said costs of expansion was the reason for uncertainty. Unchanged at 7%, that was the highest reading since February 2020. Perhaps most notably, for those reporting an uncertain outlook, a record 22% share blamed economic conditions.



As much as a shifting political landscape has benefitted small business optimism, January did also see an interesting spike higher in the percentage of businesses reporting taxes and government red tape as their biggest issues as the threat of tariffs were quickly introduced. That reading rose to 27% of responses which was the highest since November 2021.



One other indication that Trump's tariff plans have caused some trepidation among small businesses is the Economic Policy Uncertainty index. As shown below, during election years it is normal for this index to rise sharply. This most recent election was a prime example with the largest election year jump to date. While things moderated significantly in the wake of the election with a 24 point decline from the October report through December (also a record for all prior election years), the most recent reading for January showed a 14 point month over month rebound. Not only is that the largest jump of any inauguration month, but it is also the largest month over month increase in the index's history.

 

Friday Before Presidents’ Day Weekend: S&P 500 Up 10 of Last 14

Trading before Presidents’ Day Weekend used to be horrible. However, there has been a noticeable improvement over the last 14 years. The longer-term track record of the market’s performance ahead of Presidents’ Day weekend from 1990 through 2010, shows DJIA, S&P 500 and NASDAQ suffered numerous and sizable declines especially on Friday. However, more recently, since 2011, the Friday before Presidents’ Day has been improving (shaded in light grey in table below). DJIA on Friday has the best record over the last 14 years, up 11 times with an average gain of 0.18%. S&P 500 has been nearly as strong, up 10 times, with an average gain of 0.19%.

 

Why This Valentine’s Day Wasn’t Red, It Was Green


“There are no bad assets, only bad prices.” Howard Marks, Co-chairman of Oaktree Capital Management

As of last Friday, the S&P 500 was only 0.07% away from yet another new all-time high. It is up a very solid 4.0% year to date, after gaining 23% last year and 24% in 2023. (Both were over 25% if you include dividends.) What stands out to me is how broad this rally has been, with all 11 sectors up on the year and seven outperforming the S&P 500. We’ve been in the camp that this year would see more broadening out and we fully expect this to continue. It isn’t about only seven companies anymore.



Beware the Calendar
Let’s get the bad news out of the way. Be aware the calendar isn’t doing anyone any favors right now. We’ve noted recently that February in a post-election year tends to be quite weak, but it is really the second half of the shortest month of the year when most of the pain comes. We are still quite bullish overall, but our take here is to be open to some choppy markets over the coming weeks, as that would be perfectly normal.

Here are two ways to show what I’m trying to say, with both showing things tend to turn right around Valentine’s Day.





The table above is always a fan favorite and it is good to see that my birthday (October 28) is still the most bullish day of the year.

The Valentine’s Day Indicator
Now for the good news. Stocks are up more than 3% year to date as of Valentine’s Day (+3.97%) and this is historically a great sign. We dubbed this one the Valentine’s Day Indicator and it suggests a good deal of green could still be in store in 2025.

We found 32 other times the S&P 500 was up more than 3% YTD as of Valentine’s Day and the rest of the year was up an incredible 30 times with an average return over the rest of the year of nearly 14%! This is well above the average rest-of-year return of less than eight percent.



Take a closer look at the table above and you’ll see the past seven times the Valentine’s Day Indicator triggered, the rest of the year was up double digits every single time. Yes, this is just one indicator, but this does little to change our stance of remaining overweight equities with a full year forecasted return of 12–15% for the S&P 500.

 

When S&P 500 is Up in January and February Full-Year Record Nearly Perfect

As of today’s new all-time high close S&P 500 is up 1.72% so far this February. Should S&P 500 hold onto its gains this February, odds for a solid full-year further improve as its historical performance after a positive January (+2.7% this year) followed by a positive February have been nearly perfect with just one fractional loss in 32 years and only two declines in the last 10 months of the year since 1938.

 

Animal Spirits Are Flagging, but There’s Plenty of Time to Get Back on Track


Let’s get it on the table. Of all the charts that raise concerns for me about the economy right now, despite a still solid base case, the one below worries me the most. Not for what it represents in itself but for what it says about where we are in the cycle in general. The unemployment rate has been rising. When it rises, it could mean trouble. At the same time, it should not be misconstrued. Economic momentum remains well in place, policy still has strong potential to keep that momentum going, and we still have strong conviction that the expansion continues in 2025.



But there is increasing risk that some of the opportunity from a rise in animal spirits that we discussed in our Outlook 2025 may be squandered. But even so, that likely would mean just an ok rather than a good economy, as discussed yesterday in a thoughtful post by our Global Macro Strategist Sonu Varghese, “DC, We Have a Problem.” And an ok economy would be plenty to support profit growth and equity markets.

Still, there is some risk at the margin that an uncertain policy environment actually suppresses animal spirits, and policymakers, including the Federal Reserve, Congress, and the president, should be mindful of this chart. We are not in late 2016, when unemployment was falling but a slowing economy had created an economic springboard that amplified the impact of a business-friendly policy environment. To the contrary, unemployment has already started rising while the economy over the last few years has actually been pretty good. Despite short-term interest rates rising to their highest level in over 20 years, the US economy grew robustly in 2023 – 2024, outpacing (by just a small margin) the pre-pandemic period from 2017 – 2019. The levers for policy to have an impact are there, but it won’t be as easy this time around and policymakers should stay laser focused on the economy.

This chart does warn that rising unemployment off its low can have a snowball effect, but there are also times when the unemployment rate has remained relatively stable at a low level for years or even made a new low. Still, you’re at greatest risk of a snowball effect when you’re at the top of a hill, not the bottom. The economy is strong right now and that creates some vulnerability to shocks because there’s a lot to potentially unwind if things get rolling. At the same time, we do not see the extended extremes in confidence, borrowing, or spending that mark the most vulnerable economies.

For some context, since 1950 the unemployment rate has reached its low a median of seven months before the start of a recession, but has been as early as just being coincident (2020) and as delayed as 16 months early (1990). Be careful with that stat, because we don’t know for sure that we won’t still establish a new low for the cycle. The current low of 3.4% was reached in April 2023, 21 months removed from the latest data point. But rather than taking that as a warning that a recession is “due,” we should take it as a sign that there are some risks but there have also been some stabilizers in place, some of which we highlight in our Outlook. Economic expansions don’t die of old age, but the longer it goes on, the greater the likelihood that complacency, and perhaps excesses, build up.

In fact, that’s what markets have been telling us as well. To show that we should never get too caught up in one signal, the unemployment rate low has historically roughly coincided with the market peak before a recession. Markets are forward looking and often very good at sussing economic risks and they have often detected when good news is bad news. That’s not what markets have been telling us in the current expansion. Markets have been sending a strong signal that economic risks are still fairly muted. In fact, the last S&P 500 all-time high was on January 23 and we may get a new one today (and believe it’s likely we see additional gains throughout the year).



So we take this all to be more of a cautionary tale. The flurry of activity from the Trump administration since inauguration day on January 20 has increased uncertainty for businesses in the near term, making it more difficult for them to plan and more reluctant to take risk. Because of that, as discussed in Sonu’s piece, we have actually seen signs of the initial surge in animal spirits become more muted. However, more pro-cyclical fiscal policy lies ahead and could be significant. At the same time, we think the Trump administration, Congress, and the Federal Reserve should be aware of economic risks and more focused on supporting the economy. Right now it feels a little like Republicans are making the same mistake that led to Democrats losing the presidency and Senate in 2024. Democrats neglected to put the economy at the center of their platform. Surprisingly, Republicans seem to be doing the same thing, just from the perspective of the other side of the aisle. But it’s still early and there’s plenty of time to get back on track.

 

Get Invested: There's Always Light...
Fri, Feb 21, 2025

Through wars, assassinations, bankruptcies, and crashes, the US stock market has always gone on to make new highs. A wise investor once said: “Never bet on the end of the world, because it only happens once.”



Get Invested: Embrace Market Declines
Mon, Feb 24, 2025

Emotions and investing don’t mix. Emotional investors tend to sell when the market is going down and buy when the market is going up. They should be doing the opposite. As shown below, if you only owned the US stock market on the day after up days since SPY began trading in 1993, your cumulative gain would be just 44%. If you only owned the market on the day after down days, you’d be up 851%!

 

A Time For Market Patience Turn Turn Turn

Buying the dip? Mega cap techs? Perhaps waiting makes sense. It feels like a correction is in the works. Note typical seasonal February and Post-election year Q1 weakness in the charts. S&P hit an ATH last week with poor breadth. President Trump is shaking things up like never before. Meanwhile, we are not even down 5% yet (except for R2K) and a retest of the election gap would only be a 6% correction for SP500.

 

Mighty Mid-Caps


Mid-Cap stocks have had a strong start to 2025. The iShares Russell Mid-Cap Growth ETF (trading under IWP) has outperformed both the S&P 500 and the Nasdaq 100 ETFs so far this year. In fact, the recent surge in this index is reaching historical levels, with concentration in the index at a decade-high. This heightened concentration is driven by a handful of explosive companies in the index.

The Mid-Cap Growth Index (proxied by IWP) has outpaced broader market indices so far in 2025. Through February 20th, according to FactSet data, IWP has returned just over 6%, compared to a 5% return for the Nasdaq 100 ETF (QQQ) and 4% for the S&P 500 ETF (SPY). Prior to a decline on February 20, IWP had posted even stronger gains, with more than five percentage points of outperformance leading into last week.

The recent increase in the index’s volatility may be partly attributed to its historic concentration. Due to the index’s annual rebalance in June, its more volatile constituents can drive significant price swings between rebalancing dates. Currently, the three largest holdings in the index account for 9.94% of its total weight (as of 1/31/2025, FactSet data)! That represents the highest index concentration, by this measure, in the last 10 years, and nearly three times the 2015 – 2023 average of 3.8%. This marks a historic surge for some of the index’s top constituents.



Powering the index’s recent move are Palantir (PLTR) and AppLovin (APP), currently the two largest stocks in the index. Palantir, best known for its data analytics software, delivered a strong earnings beat in its February 3rd report, sending the stock soaring nearly 24% the following day. While Palantir may trade at a high valuation, stock price movements often reflect a “better or worse” dynamic rather than a simple “good or bad” assessment. In that sense, Palantir’s recent large upward revision in earnings estimates signal a significantly better outlook than previously expected. Since June 2024, Palantir’s 2025 earnings per share expectations have increased by 35%, while 2026 estimates have increased by 45%, according to FactSet consensus estimates.



AppLovin has experienced a similar surge. The company, known for its mobile gaming advertising business, has thrived following Apple’s IDFA tracking changes. The company’s 2025 earnings per share expectations have increased 77% since June 2024, with 2026 expectations soaring by 110%, according to FactSet consensus estimates. Both companies demonstrate the potentially higher earnings growth that investors look for when investing outside of larger market indices.



The Mid-Cap Growth Index’s recent outperformance has been fueled by high-growth stories. With index concentration at its highest level in a decade, investors may benefit from understanding the growth drivers behind its largest constituents. Palantir and AppLovin have powered much of the index’s gain, and their rising earnings expectations appear to be a key catalyst. With the index’s annual rebalancing scheduled for June, the Mighty Mid-Caps may remain volatile until the reshuffling occurs.

 

Get Invested: Odds That Can Beat "The House"
Tue, Feb 25, 2025

Our "Get Invested" series is a simple yet powerful resource designed to help anyone understand why investing in stocks for the long term is one of the best financial decisions they can make. The slide below from our Get Invested piece is titled "Odds That Can Beat The House."

Casinos make money making sure bettors eventually lose more often than they win. The stock market is the opposite. The longer you play, the better your odds. Historically, the odds of the S&P 500 being up over all one-month periods has been 63%. Over a year, the odds of a gain jump to 75%, and they jump to 94% over six years. Since 1928, all 16-year time frames have seen positive returns.