These 2 Key Indicators Are Flashing Green
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I get suspicious whenever the so-called analysts on financial television start flourishing their pom-poms: Rah-rah stocks! To see if the bullish cheerleading is warranted, I like to check two sometimes ignored trends: corporate capital expenditures (capex) and business formation.
Sure, macroeconomic data and earnings performance are important. However, unless companies are investing in their future competitiveness and entrepreneurs are creating new start-ups, it’s difficult to be optimistic about the direction of stocks.
I recently scrutinized those two key indicators and found that they’re on an upward trajectory, which supports the bull case.
So far, the bull is staying alive amid optimism about the global economy. On Wednesday, the S&P 500 rose 6.01 points (+0.15%), to eke out a new record high. The Dow Jones Industrial Average gained 16.02 points (+0.05%), while the tech-heavy NASDAQ slipped 9.54 points (-0.07%).
In pre-market futures contracts Thursday, all three U.S. indices were trading in positive territory. Wall Street’s mood was lifted when the Federal Reserve’s minutes released Wednesday showed that Fed members view inflation as under control.
The green light for investors…
In previous articles, I’ve expressed concern about signs of excessive speculation and warned you to take precautionary steps to hedge your portfolio.
That said, I’m bullish about prospects for economic growth and stock market appreciation this year. The following data help explain why.
Research firm CSIMarket projects that S&P 500 capex growth across all sectors will show a year-over-year growth rate of 18.1% in the first quarter, compared to a decline of 0.27% for all of 2020.
According to the Institute for Supply Management, annual capex in 2021 is expected to increase by 2.4% in the manufacturing sector after a 2.4% decline in 2020. Revenues are projected to grow this year in 15 of 18 manufacturing industries. Companies are preparing for an influx of cash in the post-COVID economy and they’re already pinpointing capex investments for the future.
Certain industries will witness even greater capex growth. Wireless carriers are expected to collectively spend $35 billion on capex in 2021, representing a year-over-year increase of 11%. That figure is expected to rise to $37 billion by 2022, an increase of 6%. The implementation of ultra-fast 5G technology will account for a big chunk of that spending.
Semiconductor capex grew 9.2% in 2020 to $112.1 billion. Analysts forecast 2021 capex in the industry to reach $127 billion, an increase of 13%.
President Biden’s “Build Back Better” blueprint for spending up to $2 trillion on infrastructure would come on top of these private sector capex outlays.
The pace of new business creation also bodes well. According to a report published in February by the non-partisan Kauffman Foundation, the rate of new entrepreneurs increased sharply from 2019 to 2020.
The following chart presents the rate of new entrepreneurs from 1996 to 2020. Last year, an average of 0.38% of the adult population, or 380 out of 100,000 adults, created a new business each month (see chart).
During socio-economic turmoil such as we’ve endured during the coronavirus pandemic, the rate of new entrepreneurs can rise dramatically as businesses close and restart, and workers are laid off and turn to part-time business activities.
Small businesses represent more than 99.7% of all U.S. employers. They employ half of all private sector workers. They account for up to 80% of the new jobs created annually in the country. Entrepreneurship is the heart of the American economy and it’s beating strongly.
It’s one reason I’m particularly keen right now on small-cap stocks. Over the long term, small-cap stocks on average have dramatically outperformed all other types of stocks. Small- and mid-cap stocks have surged in recent months on the strength of better-than-expected quarterly earnings results. They probably have further to run as the economy heats up.
