In August, the NFIB Small Business Optimism Index increased by 0.5 points, reaching 100.8. This is nearly 3 points above the 52-year average of 98. Out of the ten components of the index, four went up, four went down, and two stayed the same. The biggest boost to the index came from stronger expectations for real sales. The Uncertainty Index also fell by 4 points to 93, though it remains above the historical average. This drop in uncertainty was influenced by clearer expectations regarding financing and planned capital spending. Survey results showed positive trends in business conditions.

Labour Market Challenges

The labor market still faces challenges, with both layoffs and hiring rates remaining low. This situation is a key concern, even though the overall outlook for business is positive. These findings suggest moderate optimism but highlight ongoing labor market issues for small businesses in the US. Despite strong data from small businesses, results were below expectations, indicating a current state of market indecision. We observe promising signs in sales expectations, but they aren’t robust enough to indicate a significant breakthrough. Therefore, it’s wise to be cautious about making large bets on broad indices like the S&P 500 anytime soon. The report points out a “frozen” labor market, which recent government data supports. The Non-Farm Payrolls report released last Friday showed an increase of only +155,000 jobs, missing expectations for the third month in a row. Meanwhile, the unemployment rate has been stuck at 4.1% since May. This stagnation is stopping markets from confidently reaching new highs.

Federal Reserve’s Dilemma

This situation is putting the Federal Reserve in a tough spot ahead of its meeting next week. Business sentiment is positive, but the labor market is struggling, making a rate change unlikely. We expect the Fed to keep rates steady, which should help limit market volatility in the short term. Given this, there’s potential in volatility markets. The CBOE Volatility Index (VIX) is around 16, indicating a calm period that seems too low given the uncertainty in hiring. Buying longer-term options, like VIX calls for December or straddles on the SPX, could be a smart way to prepare for a potential market shift once the labor market starts to thaw. The gap between strong sales expectations and poor labor quality suggests a widening divide. Companies that innovate may thrive while those that rely on labor could struggle. It might be wise to consider trades favoring technology and automation sectors over small-cap and service-oriented businesses. This could include buying call options on tech-focused ETFs and put options on the Russell 2000 index. This scenario resembles the sideways market of 2015 when the economy was growing but not fast enough to create a clear trend. That period was characterized by quick, sharp movements rather than sustained trends. Therefore, we should prepare for sudden spikes in volatility instead of expecting a smooth rise or fall in the upcoming weeks. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now