In case you missed it, the Russell 2000 stock index recently hit an all-time high. At the time of this writing it is up more than 10 percent so far in 2018. This is a much stronger performance this year than either the Dow Jones Industrial Average (up above 1 percent) or the S&P 500 (up 4 percent), and it is comparable to the 12 percent gain in the tech-heavy Nasdaq composite index.
For those who are less familiar with the Russell 2000, it is entirely composed of "small" U.S. companies. Although big corporations tend to garner all the media attention — and the ire of presidential tweets — the vast majority of American companies are small. Apart from a few materials producers, this includes all companies I can think of in the plastics industry.
There are a few publicly traded companies that manufacture plastics products included in the Russell 2000. But regardless of whether shares of your company trade publicly, the strong uptrend in this index is a good indicator of future business conditions for almost all small U.S. manufacturing companies.
As the third quarter gets underway, U.S. businesses are enjoying the benefits of tax cuts, rising employment levels and strong economic growth. By their nature, stock markets are forward-looking, and the recent rise in the Russell 2000 indicates that investors expect these benefits will continue for small companies into the foreseeable future.
The favorable business conditions that currently prevail in the United States are also good for big American companies. But the large, multinational companies represented in the Dow or the S&P 500 are also exposed to the higher risks created by tariffs and the escalation of trade tensions. In contrast, small U.S. companies tend to be domestically focused and many of them may actually benefit from the tariffs imposed on imported goods.
This does not mean that small businesses are totally immune to the negative economic effects of a sustained trade war. But despite the preponderance of negative reports in the mainstream media, I still believe the most likely outcome is that cooler heads will prevail, and the pertinent global leaders will soon start to negotiate trade agreements that are fairer for all countries.
I am a strong proponent of free trade with a disdain for tariffs and other nonmonetary barriers. But the current trade situation with China and other countries is untenable. On average, the U.S. has much lower tariffs on imported goods and services than most of our major trading partners. These asymmetrical trade arrangements are the legacy of a time when the global economy was at a much different level of development. For the sake of our long-term prosperity, we must aggressively act to revise and update the trade agreements that have persisted for the past several decades.
Many people do not like Trump's public behavior or negotiating style, but few will argue that his actions so far demonstrate he is a strong advocate for U.S. companies. When all that is known about the potential risks and benefits to the U.S. economy are weighed, the stock market is optimistic about the outlook for small U.S. companies, including most plastics processors. I agree with the markets.
A recent survey of small-business owners suggest that they are also optimistic. In its most recent release, the National Federation of Independent Business (NFIB) reported that the June Index of Small Business Optimism posted its sixth-highest reading in survey history.
The June reading was 107.2, a slight decline from the previous month, but still quite close to the all-time high of 108 set in 1983. NFIB also reported that since December 2016, the month after Trump was elected, this index "has averaged an astounding, unprecedented 105.4" and that overall, this was "a very solid report, with the index among the highest readings in 45 years."
According to the report, the most important problem small businesses face continues to be finding qualified applicants for positions they are trying to fill. But considering the alternatives, this is a good problem to have because it means that demand for their products is strong and they are struggling to meet this demand. And the latest data from the Bureau of Labor Statistics indicates that despite the low levels of unemployment, there is still a bit of slack in the labor supply. The net result of this situation may not be ideal for business owners, and the issue of job vacancies will persist. But this also indicates that the current expansion has not yet hit its peak and therefore can last a while longer.
The current conditions also bode well for continued strong investment in capital equipment and robust mergers and acquisitions activity. For some industries and geographic regions, the data that measures these activities might decline a bit from their recent high levels, but the national totals should remain strong by historical standards for several more quarters.
