Chart of the Week

Weekly chart using economic data to address timely market topics from the Wells Fargo Investment Institute Global Investment Strategy team.

January 18, 2018

Michael Taylor, CFA, Investment Strategy Analyst
Ken Johnson, CFA, Investment Strategy Analyst

Small Business Growth May Help Extend the Recovery

Small Business Growth May Help Extend the RecoverySource: Bloomberg, December 23, 2017. NFIB = National Federation of Independent Business. SA= seasonally adjusted.

National Federation of Independent Business (NFIB) Small Business Optimism Index

In the past year, optimism among U.S. small business owners has soared. This is important because, according to the Small Business Administration (SBA), small businesses (those with fewer than 500 employees) make up 45% of U.S. gross domestic product (GDP) and more than 99% of all U.S. firms. Small-business vitality is a critical component of economic growth and key to extending the current recovery.

This chart shows that the NFIB Small Business Optimism Index recently reached the second strongest level in its history. This index is a gauge of how small business owners feel about the economy and the outlook for their firms. When optimism is robust—as it is currently—owners feel better about investing in their businesses and are willing to take on more risk through hiring more workers or making capital outlays.

What it May Mean for Investors

The new tax law should bode well for small business owners as it lowers effective tax rates and increases pass-through deductions. If implemented effectively, these tax reforms should support small business optimism and growth and result in increases in personal income and in consumers who are more confident about spending. Investors, in turn, should benefit from a growing economy, a reviving consumer, and small business growth.

Risk Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Small-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks.

Definitions

NFIB Small Business Optimism Index is the small business optimism index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members. The index is a composite of ten seasonally adjusted components based on questions on the following: plans to increase employment, plans to make capital outlays, plans to increase inventories, expect economy to improve, expect real sales higher, current inventory, current job opening, expected credit conditions, now a good time to expand, and earnings trend.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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