“Small caps,” or small-capitalization companies, could be in trouble next year if signs from the NFIB survey are correct.
In September 2019, I wrote “NFIB Survey Trips Economic Alarms,” It was just a few short months before the U.S. economy fell into a deep recession. The latest NFIB survey sends a strong warning to investors piling into small-cap stocks.
However, let me recap why the NFIB data is essential to investors. (Data via SBA.Gov)
“There are currently 32.5 million small businesses in the United States. Small businesses (defined as fewer than 500 employees) account for 99% of all enterprises, employ 61 million people, and account for nearly 47% of private-sector employment.” Data as of Dec 2021
The chart below shows the number of firms that have employees versus none. (Non-employer firms account for tax-shelters, trusts, estate plans, etc.)
A Word On The BLS Employment Report
Notice that the number of firms that have employees remains relatively unchanged. The data below shows the number of births and deaths of businesses over time.
That data is crucial in calculating the employment data for the U.S. When the BLS reports employment data, part of the calculation includes an “adjustment” based on the births of new (small cap) firms. In theory, if the economy is birthing new businesses each month, those businesses should hire at least one employee. However, as we see above, the vast majority of firms, and the only type growing in number each year, have ZERO employees.