A Small Business Slump Is Coming

Stocks traded flat this morning as the “churn” continued. With little to look forward to, the market turned its attention to the $1 trillion bipartisan infrastructure bill. The Senate is expected to pass the bill this afternoon.

Dow stocks rose in response while tech shares slumped. Banks enjoyed solid gains, too, as Treasury yields continued their climb from yesterday.

Reopening-sensitive names, on the other hand, fell as Covid delta variant fears lingered.

“In the last couple of weeks, we’ve started to see a little bit of pullback in some of the travel and entertainment-type categories, really with the most noticeable pullback in spending on airlines,” explained JPMorgan Chase senior economist Jesse Edgerton.

“It’s still a small decline compared to the absolute collapse essentially to zero that happened during the first Covid wave back in March and April of last year […] Now that we’re at a higher level and people are starting to travel again to some extent, it looks like they’re pulling back more than they did when they were still at very low levels last year.”

Other analysts were quick to say the market would eventually get over the delta variant thanks to dovish monetary policy.

“I think a lot of the fears around the delta variant in particular are a bit overblown,” remarked Elyse Ausenbaugh, JPMorgan Private Bank global market strategist.

“Although I think investors are grappling with the delta variant and treating that as a primary brick in the so-called ‘wall of worry,’ I don’t think it’s something that derails the longer-term view. Ultimately, investors are going to stay focused on those super-strong fundamentals, like easy financial conditions, robust consumer demand, and also that labor market recovery.”

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And the infrastructure bill couldn’t come any sooner following the latest NFIB Small Business Optimism Index reading, which sunk 2.8 points to 99.7 for the month of July.

“Small business owners are losing confidence in the strength of the economy and expect a slowdown in job creation,” said NFIB Chief Economist Bill Dunkelberg.

“As owners look for qualified workers, they are also reporting that supply chain disruptions are having an impact on their businesses. Ultimately, owners could sell more if they could acquire more supplies and inventories from their supply chains.”

In addition, the survey found that expected sales (-4%), business conditions (-20%), and earnings (-13%) over the next three months all decreased.

The ongoing labor shortage was the most common apparent hurdle among small business owners. 49% of survey respondents reported unfilled job openings in July.

Dunkelberg’s view matches that of many economists. Yes, the US economy is expanding rapidly, but at a reduced pace now that the fiscal stimulus has faded.

The upcoming infrastructure bill could help with this dramatically. The question is, however, what will happen when the stimulus ends?

If the US economy is to continue growing at its current pace, it’ll need more stimulus to do so.

Eventually, the government will have to call it quits. So too will the Fed via the tapering of its bond purchases.

When that happens, stocks should correct rapidly. But until it does, the bull market is still very much “on.”

Thanks almost entirely to the persistent support of stimulus from Congress and quantitative easing provided by the Fed.

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