Promising signs

Small businesses were crushed by the lockdowns, and sentiment was in the dumps not too long ago. But as Chart #2 shows, small business optimism has rebounded strongly, and is now higher than it was at any time during the slow-growth Obama years. However, optimism is still substantially lower than it was two years ago.

Chart #3 adds some meat to the small business story. Here we see that hiring plans recently have soared to relatively high levels (blue line). Despite the small army of the unemployed looking for work (~13 million, as Chart #4 shows), businesses continue to report difficulties in filling positions with qualified workers (red line, Chart #3). There is a lot of activity going on behind the scenes—and the LA freeways are getting more congested.

Chart #5 shows a very surprising surge in the prices of used autos in the past 3 months. Used car prices are now 16% higher than they were a year ago! Some lucky people must have found themselves with extra money, while others are finding cheap borrowing rates (borrow and buy!). Everyone is eager to get back out on the road again. You can also find hints of inflation in this chart. After almost two decades of declining inflation-adjusted prices (red line), prices are now exploding to the upside no matter how you look at it. We’re haven’t seen anything like this since the inflationary 1970s.

Chart #6

Finally, Chart #8 is an update to what is now a perennial favorite of mine. Here the latest stock market drop looks a lot like all the others in recent years, in the sense that all the important declines in equity prices have been strongly correlated with a surge in the fear index (Vix). Fear is still very much with us, given the still-elevated level of the Vix, and risk-aversion is still quite strong, as evidenced by the 10-yr Treasury yield, which is hugging extremely low levels (0.6 – 0.7%). These are not the symptoms of an over-extended market.

I know that a lot of people worry that stocks are in a Fed-blown bubble, but with a 1-yr forward PE ratio of 26-27, stocks today are simply discounting a sizable pickup in earnings over the next year. If the economy continues to improve as it has these past few months, that’s not unreasonable at all. Especially considering that the alternativez to stocks—notes and bonds—sport PE ratios that are an order of magnitude higher than stocks. One quick example: the 0.7% yield on Treasuries is equivalent to a PE ratio of 143.