Small business sales outlook rebounds

The engine that drives the economy looks like it might be getting more fuel.

While huge stocks like Apple generate almost all financial media headlines, it's small businesses that should really be getting the attention, according to the Small Business Administration:

"Small businesses are the lifeblood of the U.S. economy: they create two-thirds of net new jobs and drive U.S. innovation and competitiveness. A new report shows that they account for 44 percent of U.S. economic activity."

Small businesses can't create jobs if they don't expect to make a profit from their product, and they can't make a profit if they don't have any sales. If we consider that sales are the most important factor, then the latest survey from the National Federation of Independent Business (NFIB) should be a good sign.

Their latest poll of around 800 businesses showed a rebound in sales expectations, turning positive after a record low in April.

This has been a good sign for stocks, except in 1975. The survey was only quarterly then, so it was less sensitive then and is likely a less accurate precedent.

Small-caps (including the Russell 2000 since 1979) also did well. Again, there was that initial medium-term drop in 1975.

The overall level of optimism from small business, not just about sales but about all aspects of their business, rebounded to above 100, which is more than a 10% jump over the past two months. As Troy mentioned in a premium note, even 5% improvements in overall sentiment have preceded the most impressive gains over the next 6-12 months.

While there are certainly some yellow flags that have been waving for the medium-term since May, we've seen a number of longer-term indicators show impressive improvement from historic lows, and those bode well over a medium- to long-term time frame.