One of the best gauges of the improvement in business conditions in the last twelve months has been the sharp rise in small business owner’s optimism. Specifically, the National Federation of Independent Business (NFIB) small business optimism index surged post the November 2016 election and has stayed strong in 2017, up 9% from year ago levels. The index has a history back to 1973 and the gains of the last year are among the strongest since the mid-1980s.
For our Ancora clients who are business owners, our anecdotal evidence is confirming the NFIB measures. Business conditions are generally quite healthy and more companies are reporting that they are positive on economic prospects; that it is a better time to expand; and while they are looking to hire, it is more difficult to find qualified applicants. They are also citing that regulation is less of a problem than year ago levels.
We cite the small business optimism index because we can see a correlating gain in small-cap and microcap stock portfolios, which we manage. Since the November 2016 election, some of the best gains in the stock market have come from the small-cap and micro-cap stock indexes. In the twelve-month period immediately following the 2016 election, the Russell 2000 and Russell Micro-Cap stock indexes were up 25% and 27% respectively. The S&P 500 was up 23%. This is in part due to the improvement in business conditions, which can have a more pronounced impact on more economically sensitive smaller publicly traded companies. The gains have also reflected improved expectations of regulatory relief and potential tax reform.
Indeed, it is especially interesting to watch the price return patterns of micro-cap stocks and the corresponding rise in animal spirits among business owners. When the expectations for regulatory relief or tax reform have improved, it has been accompanied by larger outsized gains in micro-cap stocks vis-avis the larger company stock indexes. Encouragingly, the internal Ancora strategies have outperformed since the November 2016 election.
There are multiple factors which contribute to favorable returns for small and micro-cap stocks over the long term, including faster sales and profit growth, and an earlier stage in a company’s life cycle. This has prompted total portfolio solutions to have an allocation to these asset classes. In the more recent period, the gains in small business optimism, and improved animal spirits, have been matched directionally by the gains for these small and micro-cap stocks, with the market proving its reliability as a long-term voting machine.
David Sowerby, CFA, is a Managing Director, Portfolio Manager at Ancora Advisors LLC a SEC Registered Investment Advisor.
The mention of specific securities, types of securities and/or investment strategies in this newsletter should not be considered as an offer to sell or a solicitation to purchase any specific securities or to implement an investment strategy. Please consult with an Ancora Investment Professional on how the purchase or sale of specific securities can be implemented to meet your particular investment objectives, goals, and risk tolerances. Past performance of these types of investments is not indicative of future results and does not guarantee dividends/interest will be paid or paid at the same rate in the future. The data presented has been obtained from sources that are believed to be accurate and credible. Ancora Advisors makes no guarantee to the complete accuracy of this information. The indexes discussed are market performance indices and are not available for purchase. If you were to purchase the securities that make up these indices, your returns would be lower once fees and/or commissions are deducted. Past performance of these indices is not indicative of future results of the securities contained in these indices.
Ancora Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States. A more detailed description of the company, its management, and practices are contained in its “Firm Brochure” Form ADV, Part 2a. A copy of this form may be received by contacting the company at: 6060 Parkland Blvd, Suite 200, Cleveland, Ohio 44124, Phone: 216-825-4000, or by visiting our website www.ancora.net/adv