Despite an improving economy, small business owners are still facing challenges. The data points that these business owners provide is something that should not be ignored.
There are more than 30 million small businesses in the United States, as reported by the Small Business Administration. It’s worth noting that small businesses make up approximately 99% of all businesses in the country. Moreover, these establishments employ nearly half of all Americans, equating to around 60 million individuals working for smaller companies.
Are Businesses Owners Feeling More Optimistic?
On Tuesday, the NFIB’s Small Business Optimism Index increased 1.6 points in June to 91.0, however, it is the 18th consecutive month below the 49-year average of 98.
When analyzing the top concerns of small business owners, both inflation and labor quality are tied for the first place, with approximately 24% of owners reporting each as their single most important problem.
On a positive note, the net percentage of owners raising average selling prices has decreased by three points, landing at a seasonally adjusted net of 29%. While this level remains significantly inflationary, it is showing a positive downward trend.
It’s essential to mention that this is the lowest reading since March 2021, further emphasizing the importance of monitoring the current trends in the small business landscape for a comprehensive understanding of the market.
Additional findings included that:
Small business owners expecting better business conditions over the next six months improved 10 points from May to a net negative 40%, 21 percentage points better than last June’s reading of a net negative 61%.
Forty-two percent of owners reported job openings that were hard to fill, down two points from May but remaining historically very high.
The net percent of owners who expect real sales to be higher improved seven points from May to a net negative 14%.
Challenges Facing Small Businesses
According to the latest NFIB monthly jobs report, it appears that small businesses are facing challenges in their hiring efforts. In June, 59% of owners indicated that they were either actively hiring or attempting to do so, which represents a decrease of four points compared to May.
Shockingly, 92% of these business owners reported that they encountered a severe shortage of qualified applicants for vacant positions.
Moreover, small businesses seem to be curbing their spending habits as well.
In the past six months, 53% of owners reported capital outlays, which is a four-point decrease from May. Among those who made expenditures, 37% invested in new equipment, while 21% acquired vehicles.
Additionally, 14% focused on improving or expanding their facilities, and 8% allocated funds for new fixtures and furniture. Lastly, 6% even went as far as acquiring new buildings or land for future expansion.
These numbers clearly indicate the current state of affairs for small businesses, highlighting the uphill battle they face in terms of hiring and financial decisions.
However, there is no cause for alarm as this indicates a shift towards a more sustainable pace, and it still surpasses the average monthly jobs gained pre-pandemic. In fact, the July figure is slightly higher than June’s revised payroll gain of 185,000.
A Move Towards Sustainable Growth
Although the headline number might be disappointing, it is important to understand that the reduced pace is actually a sign of stability rather than weakness.
This growth rate aligns with what some economists consider the long-term capacity of the U.S. labor force, ensuring that growth remains steady and manageable. It represents a maturing recovery where employers are strategically aligning job growth with underlying economic fundamentals.
Unemployment Rate and a Tight Labor Market
Another positive development is the decrease in the unemployment rate from 3.6% in June to 3.5% in July, against economists’ expectations of no change. Despite an aggressive Fed, the Unemployment Rate remains at historical lows.
This decline reinforces the idea of a tight labor market, where employers are competing for workers, potentially leading to wage growth. Such a scenario can boost consumer spending and confidence, thereby driving further economic expansion.
Implications for the Federal Reserve and Interest Rates
Given the numbers, it doesn’t seem likely that the Federal Reserve will rule out future interest-rate hikes. Despite slower job growth, the continuous expansion and tight labor market may push the Fed to stick with gradual monetary tightening. This can have various effects on investors’ portfolios, especially in sectors sensitive to interest rates, like bonds and financials.
When making investment decisions, keep in mind:
Bonds: Given the possibility of future interest rate hikes, it may be wise to consider short-duration securities with less sensitivity to rate changes. Equities: Sectors benefiting from economic growth and consumer spending can remain appealing, particularly with potential wage growth driving increased spending. Dollar & Commodities: Stay vigilant on the U.S. dollar and commodities as their valuations can be impacted by interest rate decisions.
Although July’s job growth might seem underwhelming at first glance, further analysis reveals a trend toward sustainable growth and a tight labor market. Take these dynamics into account when determining your asset allocation and investment strategy, and stay tuned for any interest rate moves by the Federal Reserve.
The Big Mac Index: Exploring Currency Valuation and Inflation
The Big Mac Index is an intriguing economic indicator that offers a unique perspective on the world’s currencies and purchasing power parity (PPP). Created by The Economist in 1986, it has since gained significant recognition as a tool for illustrating currency value comparisons.
What is the Big Mac Index?
Taking a common product available in numerous countries—the McDonald’s Big Mac—the index compares its prices across different currencies. This provides insight into whether a currency is overvalued or undervalued in relation to the US Dollar.
Understanding Purchasing Power Parity (PPP)
The theory underlying the Big Mac Index is purchasing power parity (PPP). According to PPP, identical goods should have the same price in different countries, assuming no transaction costs or trade barriers, when expressed in a common currency.
The idea is that if a currency is overvalued, local goods will seem more expensive to foreigners, and foreign goods will appear cheaper to locals. Conversely, an undervalued currency will make local goods seem cheaper to foreigners and foreign goods more expensive to locals.
How it Relates to Inflation
While the Big Mac Index does not directly measure inflation, it can indirectly provide insights into inflationary pressures. If the price of a Big Mac rises more quickly in one country compared to others, it may indicate a higher local inflation rate.
This shift in the Big Mac Index can serve as an indicator that the currency might be overvalued.
Unveiling the Unique Perspective of The Big Mac Index
The Big Mac Index offers a captivating and informal lens through which to view currency valuation and inflation trends. Its analysis of relative currency values provides valuable information for economic considerations and global financial insights.
While the Big Mac Index is a simplified measure, it is not without limitations. Factors that can affect its accuracy include:
Taxes and Import Duties: Varying taxation policies across countries can impact the retail price of a Big Mac.
Cost of Living and Labor Costs: These factors differ significantly between countries and can influence the final price.
Local Preferences and Competition: McDonald’s may adjust the Big Mac price differently based on competitive pressures or consumer preferences in certain regions.
Using the Big Mac Index:
Despite its simplicity, the Big Mac Index serves as a powerful tool for visualizing the complex concept of Purchasing Power Parity (PPP). It is instrumental in:
Gauging Relative Currency Valuation: Economists and investors rely on the Big Mac Index to assess the relative valuation of currencies and identify potential mismatches between market exchange rates and PPP.
Enhancing Learning: The index is an effective teaching tool, providing accessibility in explaining concepts like exchange rates and PPP.
The Big Mac Index is a novel and engaging economic indicator that offers insights into currency valuation based on the theory of PPP. While it does not directly measure inflation, its intuitive nature makes it a valuable resource for understanding fundamental economic concepts.
However, it is crucial to consider its limitations and underlying assumptions. The index should be used as a supplementary tool or for educational purposes rather than as the sole basis for economic decision-making.
In today’s investment landscape, where uncertainties abound, the ability to quantify and effectively manage risk can be a game-changer. Value at Risk (VaR) is a powerful tool that has gained substantial traction over the years due to its straightforward approach to estimating financial risk.
Value at risk Definition and Formula:
Value at Risk (VaR) is a statistical measure that quantifies the level of financial risk within a firm or investment portfolio over a defined time frame. It facilitates the calculation of the maximum potential loss a portfolio could incur with a given confidence level.
Typically, VaR is assessed over a one-day or ten-day period (Jorion, 2007).
The general formula for VaR is as follows: VaR = Portfolio Value x Z-score x Portfolio’s Standard Deviation
Here, the Z-score indicates the number of standard deviations away from the mean in a normal distribution, corresponding to the desired confidence level.
For instance, a Z-score of 1.65 is employed for a 95% confidence level, while a Z-score of 2.33 represents a 99% confidence level. The portfolio’s standard deviation reflects the volatility of the portfolio (Linsmeier & Pearson, 2000).
Let’s bolster our understanding of VaR through an example.
Consider a portfolio valued at $1 million, characterized by a standard deviation (volatility) of 5%. If we intend to calculate the one-day 95% VaR, we would utilize a Z-score of 1.65.
Applying the VaR formula, we find VaR = $1,000,000 x 1.65 x 5% = $82,500.
This implies that over a one-day period, you can be 95% confident that your losses will not exceed $82,500.
Pitfalls and Controversies Surrounding VaR
Despite its widespread use, Value at Risk (VaR) is subject to several criticisms, which are crucial to understand when utilizing this risk measurement tool in the financial industry.
Assumption of Normal Distribution:
VaR commonly assumes that financial returns follow a normal distribution, which is often an inaccurate representation in real-world financial markets.
Many financial returns exhibit skewness and kurtosis, indicating fat tails and asymmetry. Consequently, VaR may underestimate the probability of extreme losses, which frequently occur in the tail regions of the distribution (Taleb, 2007).
Failure to Specify Loss Beyond the VaR:
While VaR provides an estimate of the maximum loss at a given confidence level, it fails to indicate the magnitude of potential losses if events surpass the VaR threshold. This limitation becomes particularly problematic during severe market downturns.
In such situations, an alternative measure called Conditional VaR (CVaR) proves more useful as it calculates the expected loss given that the VaR threshold has been exceeded, offering a more comprehensive risk estimate (Acerbi & Tasche, 2002).
Lack of Subadditivity:
Ideally, the combined VaR of two portfolios should be equal to or less than the sum of their individual VaRs, assuming diversification benefits. However, VaR lacks the property of subadditivity, which diminishes its reliability as a risk measurement tool for diversified portfolios (Artzner et al., 1999).
2008 Financial Crisis
The 2008 financial crisis served as a wake-up call, exposing the limitations of VaR. Many financial institutions relying on VaR models were ill-prepared for the extreme events of the crisis. With VaR models predominantly leveraging short-term historical data, they failed to accurately predict and account for the severity of the crisis, leading to substantial losses (Danielsson, 2011).
By recognizing and understanding the pitfalls and controversies associated with VaR, financial professionals can better assess its limitations and explore alternative risk measurement approaches to ensure more accurate risk management.
Acerbi, C., & Tasche, D. (2002). On the coherence of Expected Shortfall. Journal of Banking & Finance, 26(7), 1487-1503.
Artzner, P., Delbaen, F., Eber, J. M., & Heath, D. (1999). Coherent measures of risk. Mathematical finance, 9(3), 203-228.
Danielsson, J. (2011). Financial risk forecasting: The theory and practice of forecasting market risk with implementation in R and Matlab. John Wiley & Sons.
Jorion, P. (2007). Value at Risk: the new benchmark for managing financial risk. McGraw-Hill.
Linsmeier, T. J., & Pearson, N. D. (2000). Value at Risk. Financial Analysts Journal, 56(2), 47-67.
Taleb, N. N. (2007). The black swan: The impact of the highly improbable (Vol. 2). Random House.
For investors looking to invest in strength understanding the different types of momentum indicators is crucial to develop a resilient investment strategy.
Both seasoned traders and investors rely on an array of tools to shape their decision-making process. Among the arsenal of tools, one stands out – the momentum indicator.
This powerful technical analysis tool offers valuable insights into the velocity of a security’s price movements. By delving into various types of momentum indicators, this article equips you with the knowledge needed to make well-informed trading decisions.
What Are Momentum Indicators?
While traders like to mention momentum tools as a singular indicator, there are actually numerous types of momentum indicators that can help investors study the momentum within the market.
Sometimes referred to as momentum oscillators, these indicators are indispensable tools for technical analysis used by traders and investors to assess the strength or speed of a price movement in a security within a specified time frame.
They are rooted in the core principle of momentum, which, in financial terms, is the tendency of a security’s price to sustain its direction. These indicators provide a means to measure the rate of price change, offering valuable insights into market volatility, trend strength, and potential reversals.
The different types of momentum indicators are typically presented as line graphs that oscillate above and below a central line or predefined boundaries, revealing overbought or oversold conditions.
Overbought conditions may imply an upcoming price decrease, while oversold conditions could suggest a price increase.
These indicators hold particular value in trending markets as they help identify the strength and potential waning of a trend.
By incorporating these indicators into their strategies, traders can identify potential entry and exit points and optimize their trading endeavors.
Types of Momentum Indicators
There are several momentum indicators available, each providing unique insights into the behavior of the stock market. Below are four of the most widely used momentum indicators that everyone should know:
Relative Strength Index (RSI)
A 10-period RSI Chart (Red)
RSI is a go-to indicator for many traders. It helps determine overbought and oversold conditions by comparing recent gains to losses over a specified period. RSI values range from 0 to 100.
A value above 70 typically indicates an overbought condition, while a value below 30 suggests an oversold condition. However, it’s important to note that RSI can stay overbought or oversold in persistent trends, so it’s best to use it in combination with other indicators.
Moving Average Convergence Divergence (MACD)
MACD indicator showing positive momentum
MACD uses two moving averages, usually the 12-day and 26-day, to identify potential buying or selling opportunities.
A bullish signal is generated when the 12-day moving average crosses above the 26-day moving average, while a bearish signal is generated when the 12-day crosses below the 26-day.
The MACD also includes a ‘signal line’ (a 9-day exponential moving average of the MACD) which can trigger additional buy or sell signals.
Stochastic indicator showing overbought levels
This momentum indicator compares a security’s closing price to a range of prices over a specific period. The stochastic oscillator fluctuates between 0 and 100.
Similar to RSI, readings above 80 are considered overbought, and readings below 20 are considered oversold. The stochastic oscillator also includes a ‘signal line’, and crossovers between the oscillator and this line can indicate potential trading opportunities.
On-Balance Volume (OBV)
Rising On Balance Volume (OBV)
Unlike other types of momentum indicators that primarily focus on price, OBV takes volume into consideration. It is a cumulative indicator that adds volume on up days and subtracts volume on down days.
Rising OBV indicates positive volume pressure that may lead to higher prices, while falling OBV suggests negative volume pressure that may precede lower prices.
By understanding and utilizing the different types of momentum indicators, you can gain valuable insights to make informed decisions in the stock market.
How to Use Momentum Indicators
While momentum indicators can offer valuable insights, it’s important to recognize their limitations. Here are some useful tips to maximize their effectiveness:
Confirmation is key: To make the most informed decisions, it’s best to combine momentum indicators with other technical analysis tools. When one indicator affirms another’s signal, it reduces the risk of false signals and increases the probability of successful trades.
Don’t overlook divergence: Keep an eye out for divergence, which arises when a security’s price moves in the opposite direction of a momentum indicator. This discrepancy often serves as a warning sign of a possible price reversal.
Bearish Divergence: MSFT stock price is rising, while the MACD indicator is falling
Consider market conditions: Remember that momentum indicators excel in trending markets, whether bullish or bearish. In range-bound or sideways markets, they may generate numerous false signals.
The MACD indicator during a sideways trading range can cause whipsaw in a portfolio
Customize your settings: Depending on your preferred trading style, adjusting the period lengths used in your indicators’ calculations can be beneficial. Shorter periods offer more sensitive readings, suited for short-term trading, while longer periods may better align with long-term investing goals.
5 Day RSI vs 21 Day RSI
Best Practices for Interpreting Momentum Indicators
When it comes to interpreting the different types of momentum indicators, there are several best practices that investors can follow to maximize their utility and accuracy.
One key practice is the utilization of multiple momentum indicators in conjunction.
By combining different indicators, one can validate and confirm signals more effectively as each indicator has its own strengths and weaknesses.
Some helpful reminders:
1) Relative Strength Index (RSI) can help identify overbought or oversold conditions, the Moving Average Convergence Divergence (MACD) is great for spotting potential bullish or bearish crossovers.
2) Cross-verifying signals across various indicators help reduce the chances of false signals and can enhance the effectiveness of trading strategies.
3) Another important aspect to pay attention to are divergences between the price and momentum indicators. These divergences often signal potential trend reversals, giving valuable insights for adjusting trading positions accordingly.
If the price is increasing while the momentum indicator is decreasing, that’s a bearish divergence indicating a forthcoming downtrend.
Conversely, if the price is decreasing while the momentum indicator is increasing, it is a bullish divergence suggesting a potential uptrend. Identifying these divergences early can help investors seize valuable opportunities and make necessary adjustments.
4) Lastly, investors can customize the settings of their momentum indicators to align with their trading style to help improve their relevance and effectiveness.
For example, a short-term trader may prefer smaller period settings that offer more sensitivity and quicker signals.
On the other hand, long-term traders might find larger period settings more suitable as they filter out market “noise” and focus on more significant trends.
Understanding the nature of the security that is being traded and individual trading style plays a crucial role in making these adjustments effectively.
Summing Up the Different Types of Momentum Indicators
To sum up, momentum indicators are an indispensable tool for traders like to assess market trends’ strength, speed, and potential reversals.
From the Relative Strength Index (RSI) to the Moving Average Convergence Divergence (MACD), these indicators offer various insights into the market’s behavior. They not only help spot overbought and oversold conditions but also detect divergences that often signal trend reversals.
However, it’s vital to interpret and utilize the different types of momentum indicators correctly. By using multiple indicators, focusing on divergences, and customizing settings to match trading styles, investors can optimize their effectiveness. Combined with a solid understanding of market conditions and continuous learning, this approach can help investors with their decision-making process and boosts the chances of successful trades.
Technical Analysis of the Financial Markets by John J. Murphy – This book is a comprehensive guide to trading that covers various aspects of technical analysis including the different types of momentum indicators.
“Technical Analysis Explained” by Martin J. Pring – Another valuable resource that delves into various technical analysis tools including momentum indicators.
Investopedia’s pages on various momentum indicators such as RSI, MACD, Stochastic Oscillator, and OBV – These are excellent online resources that offer a deep-dive into each of the different types of momentum indicators.