Janet Yellen didn’t sound too jazzed about the current pace of wage growth in the U.S., though she did say that pick ups in the employment cost index and average hourly wages were a “hopeful sign.”
That could be a “hopeful sign” for the stock market too, despite the implications for interest rates -- not to mention corporate profit margins in an environment where consumers seem more inclined to save and pay off debt rather than spend any extra cash.
“U.S. equities respond well to rate hikes when wages rise,” Julian Emanuel, strategist at UBS AG, pointed out in a recent report. “More than 100 percent of the cumulative market gains of the past quarter century have occurred during these periods of rising wages.”
And the growth in paychecks isn’t likely to subside soon, he asserts, citing a UBS survey done with Duke University and CFO Magazine that shows chief financial officers expect wages and salaries to grow by an average of 3.3 percent over the next 12 months. That’s well above the estimates for increases in consumer prices, so it should leave everyone with a bit more cash to spend freely.
In fact, the latest government data showed hourly earnings were up 2.3 percent. Since the latest consumer price index came in at minus 0.2 percent, that puts growth in earnings above CPI by the most since 2009.
Savings from lower fuel prices so far haven’t corresponded to a dollar-for-dollar increase in discretionary spending, so it’s not a no-brainer that improving wages will either -- especially if higher interest rates create a greater incentive to save. It is, however, a hopeful sign.
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