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Optimism among small business soared in December by the most since 1980 as the economy’s prospects improved dramatically in the aftermath of the presidential election.  The indicator itself is now at the highest level since the end of December 2004.   Moreover a subcomponent indicating small companies desire to expand via increased investment and hiring is now three times the average of the current expansion.

While I traditionally have little regard for sentiment surveys as I think they are the “ultimate feedback indicator,” I do think this data is extremely significant.

About 2 years ago for the first time in history companies thought political/government risk was the greatest threat to business, not economic as had been the case since inception.  Government regulations and dictums were rising at an exponential rate creating economic paralysis for all but the largest corporations.

Many times I have referenced BLS data indicating that 90% of job creation from 1996-2007 was from small businesses, defined as companies with 499 employees or less.  Job creation in this sector since 2008 has been virtually insignificant thus a major reason for a near 40 year low of the labor participation rate.

The recent small business sentiment indicator states yes.

As noted yesterday, the small cap and value shares have been greatly outperforming, especially since the election.  I also reiterated a Goldman Sachs dated report stating at the beginning of 2016 small cap and value shares were at their lowest valuations as compared to their large capitalized brethren since 1980.

I think the markets are at the nascent stage of another golden era for the small and value cap stocks, the first in at least 15 years.  As stated, small business confidence soared the most since 1980, the sentiment index is at the highest level since 2004, plans to hire and expand is three times the eight year average, all the result of President Trump lifting the yoke of the long arm of government.

Will economic creation surprise considerably on the upside, the result of reduced regulation that inspires confidence and greater monetary velocity?  I think the odds are over 75%.

If the above scenario does materialize, 2017 will be a great year for many asset classes perhaps at the expense of mega capitalized growth issues that have dominated since at least 2011.

Last night the foreign markets were up.  London was up 0.11%, Paris up 0.10% and Frankfurt up 0.32%.  China was down 0.79%, Japan up 0.33% and Hang Sang up 0.84%.

The Dow should open flat.  Oil is up about 1% on unexpected inventory reduction.  There is some expectations heading into today’s press conference with President Trump.  The 10-year is unchanged at 2.38%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.