Rosy December for Small Business Sales, but Restaurants are Left Out: An Analysis

The latest news indicates that December was a positive month for small businesses in general, yet restaurants seem to be struggling in this season of holiday cheer. This juxtaposition raises important questions about the short-term and long-term impacts on financial markets and specific sectors. In this article, we will dissect the implications of this news, drawing parallels with historical events, and explore the potential effects on various stocks, indices, and futures.

Short-term Impact on Financial Markets

The immediate reaction from investors could be mixed. Generally, a report indicating strong sales for small businesses can lead to positive sentiment within the market, especially in sectors related to retail and consumer goods. This can lead to a rise in indices such as:

• Russell 2000 (RUT): This index is heavily weighted toward small-cap stocks, and strong performance in small businesses typically boosts this index.
• S&P 600 SmallCap (SML): Similar to the Russell 2000, this index tracks small-cap stocks, which could benefit from the reported sales surge.

However, the exclusion of restaurants from the positive sentiment could lead to declines in specific sectors, particularly in hospitality and dining. Stocks to watch include:

• Darden Restaurants (DRI): Parent company of several restaurant chains, which could see selling pressure if investors react negatively to the news.
• Brinker International (EAT): A significant player in the casual dining space that may be impacted due to the poor performance of restaurants.

Potentially Affected Futures

Futures contracts related to commodities like food and beverages may also be impacted. If the restaurant sector continues to struggle, it may lead to a decrease in demand for certain agricultural products, affecting:

• Corn Futures (CORN): As a primary ingredient in many restaurant offerings, a decline in demand could lead to lower prices.
• Wheat Futures (WHEAT): Another key ingredient that could see fluctuations based on restaurant sales performance.

Long-term Impact on Financial Markets

In the long run, the divergence between small business performance and the restaurant industry's struggles can indicate underlying economic trends. If small businesses continue to thrive while restaurants falter, it could lead to a broader reevaluation of consumer behavior and spending patterns.

Historical Context

Looking back at similar events, we can draw parallels to December 2020 when small businesses experienced a surge due to holiday spending, but restaurants were still feeling the effects of COVID-19 restrictions. This led to a significant divergence in stock performance, with indices like the Russell 2000 outperforming those heavily weighted in the hospitality sector.

• Date for Reference: December 2020 – The Russell 2000 rose by approximately 9% compared to a decline of around 5% in restaurant stocks.

Conclusion

The current news about a "rosy December" for small business sales, while restaurants are left out, presents a complex picture for investors. In the short term, we could see gains in small-cap indices like the Russell 2000 and S&P 600, while restaurant stocks may face headwinds. In the long term, this divergence could lead to shifts in market sentiment and consumer behavior that investors should closely monitor.

Investors should remain vigilant and consider both the positive and negative signals from this news as they navigate the financial markets in the coming weeks and months.