VIPs
- Since October, large service firms shed a net 87,000 jobs while SMEs added 720,000, per ADP’s January Employment report; this divergence matches ISM and Markit’s Service Business Activity Indices, which pull from large firms and the broader economy, respectively
- For the first time in two years, large cap U.S stocks have stopped outperforming their small and midcap peers; by January’s end, the S&P 500’s 15.2% YoY gain lagged that of the S&P Midcap 400’s 16.6% annual advance and the S&P Smallcap 600’s 21.3% YoY increase
- Paychex’s Small Business Employment Watch saw five of eight industries grow in January while earnings and hours worked rose for the first time in six months; while restaurant openings were down 16% over 2020, per Yelp, they were only off by 4% in the final quarter
A Lion lay asleep in the forest, his great head resting on his paws. A timid little Mouse came upon him unexpectedly, and in her fright and haste to get away, ran across the Lion’s nose. Roused from his nap, the Lion laid his huge paw angrily on the tiny creature to kill her. “Spare me!” begged the poor Mouse. “Please let me go and someday I will surely repay you.” The Lion was much amused to think that a Mouse could ever help him. But he was generous and finally let the Mouse go. Some days later, while stalking his prey in the forest, the Lion was caught in the toils of a hunter’s net. Unable to free himself, he filled the forest with his angry roaring. The Mouse knew the voice and quickly found the Lion struggling in the net. Running to one of the great ropes that bound him, she gnawed it until it parted, and soon the Lion was free. “You laughed when I said I would repay you,” said the Mouse. “Now you see that even a Mouse can help a Lion.”
Invoking Aesop’s The Lion and the Mouse contrasts the King of the Jungle with a tiny rodent that proves to be the more shrewd of the two in the end. We observe a similar dichotomy in today’s left chart. First, it’s key to note the difference between the soft data provided in the Institute for Supply Management (ISM) and IHS Markit surveys. ISM data are drawn from members who are procurement professionals and tend to represent business conditions in larger companies. IHS Markit, however, polls C-level executives across the full range of company sizes, from small to medium to large and thus presents a more balanced take on the broad U.S. economy.
The truest pictures are drawn with raw data of the not seasonally adjusted (NSA) variety, hence our depiction of the annual trend in ISM’s Services Business Activity NSA index up against the year-over-year (YoY) change in Markit’s Services Business Activity NSA index. The normalized illustration revealed the first setback in the ISM trend in eight months. Markit’s path, on the other hand, is one of a persistent recovery.
What’s different between this January and last? ISM noted that the industries reporting a decrease in activity in January 2020 – mining, arts/entertainment/recreation, wholesale and other services – were not the same as those posting declines in January 2021 – retail and education. There were also 5.2 million more payroll employees in the latter two industries than in the former four. A stalling in service business activity this year should have a greater impact from a labor perspective.
Enter the January ADP Employment Report which showed a marked divergence between the biggest service firms, with 1,000-plus employees, and those of small and medium-sized concerns (SMEs), with headcounts between 1 and 499. Since October, the largest have shed a net 87,000 jobs, with back-to-back declines in December (-131,000) and January (-3,000). Conversely, the SMEs added a total of 720,000 positions. These shorter run movements helped create the “cross-the-streams” moment in the red and blue lines that continues to widen as the top-line activity in the yellow and green lines deviate.
An excerpt from January’s Markit Service survey shed light on SME’s outperformance: “The increase was often attributed to greater demand from new and existing clients. At the same time, foreign customer demand picked up, as new business from abroad returned to expansion.”
The divergent narrative between the largest firms and SMEs is also playing out in the equity market. Shifting to the right chart, large cap U.S. stocks have stopped outperforming their midcaps and small caps peers for the first time in two years. By the end of January, the S&P 500’s 15.2% YoY gain (orange line), lagged that of the S&P Midcap 400’s 16.6% annual advance (purple line) and the S&P Smallcap 600’s 21.3% YoY increase (light blue line).
To better appreciate January’s “down-in-size” leaders, look back to when they were the YoY underperformers, in the midst of COVID’s acute shock between February to October. Then came November, and with it the diminishment of two major risks – a contested presidential election never came to pass and vaccine progress brought hope for a real end to the pandemic. October’s annual declines in the Midcap 400 and Smallcap 600 switched to positive in November and haven’t looked back since. January amplified the trend as a Blue Wave rolled out of Georgia, and along with it, hopes for even more fiscal juice.
IHS Markit has also teamed up with ADP competitor Paychex to produce a monthly Small Business Employment Watch. Released yesterday, January’s data echoed ADP’s small business strength. Five of the eight industries saw growth while after a six-month slowdown, both earnings and hours worked picked up. The only asterisk was the Small Business Jobs Index, which continued to moderate last month. DailyJobCuts.com corroborates that pockets of weakness persist as 531 small business closed in January, a number that eclipsed November and December’s combined 386.
The circle is squared when you factor in new small business openings. As per Yelp, while restaurant and food business openings were down 16% for the full year over 2020, openings were off by only 4% in 2020’s last three months. Assuming stimulus comes through, expect the “mouse” rally in midcaps and small caps over the large cap “lion” to continue.