What's On Tap..

Expectations

The December release of the National Federation of Independent Business (NFIB) Index of Small Business Optimism hit its highest level since 2004, with a reading of 105.8 versus consensus expectations of 99.6.  The NFIB surveys approximately 600 small business owners on a monthly basis and is a composite of ten different components as shown below:

Source:  National Federation of Independent Business

Source:  National Federation of Independent Business

The dramatic rise in the December optimism was led by a 38 percent increase in small business owner’s expectations for the economy to improve.  The improved expectations on the economy have led to small businesses increasing spending on capital investments as they expect sales to move higher.  One of the main reasons cited for the change in optimism is the “expectations” that the new administration will loosen the regulatory environment that affects many different industries.  This relaxed regulation should help many small businesses and spur faster economic growth. Moving forward, growth has the potential to be a positive for many industries, especially the banks.

In our fundamental portfolios we continue to have an overweight position in bank stocks as we believe valuations are attractive and there are a number of catalysts to increase earnings in the coming years.  A friendlier regulatory environment will certainly help the profitability and top line growth of banks, but there are other positive factors as well.  The heightened confidence of both consumers and businesses should lead to loan growth and additional deposits for the banks which will increase earnings.  With interest rates rising and the yield curve steepening, banks will be able to earn more money as they earn a higher rate on deposits and can charge a higher rate for consumer and business loans.   Banks have yearned for this Net Interest Margin (NIM) improvement given the past near zero interest rate environment. There are still risks that some of these positive outcomes will not be realized as soon as expected.  We will get an early look on Friday when many of the big banks report earnings for the fourth quarter.  The increased business optimism certainly gives us increased confidence in bank earnings improving.

 

 
Christopher Deeley, CFA, Portfolio Manager

Christopher Deeley, CFA, Portfolio Manager

 

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