by Bryan Perry

September 8, 2021

It is relatively east to put together a worry list of items and scenarios that could trigger a stock market correction of 10% or more. But none stands out more than inflation – namely, wage inflation. Surveys show this to be a major concern of corporate CFOs, who regard higher wages as the biggest risk to future profit margins. While commodity inflation ebbs and flows, wage and services inflation are considerably more permanent – and we just saw strong evidence of this in last Friday’s employment situation release.

Hourly Earnings Index Chart

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Gad Levanon, The Conference Board’s vice president for labor markets, said changes were more visible over time when looking at salary budget increase averages (the mathematical mean) rather than medians (the middle value). He shared that, according to The Conference Board survey:

  • The average salary increase budgetwas lower this year than in pre-pandemic years.
  • Average raises in 2022are likely to be higher than in 2021, returning to pre-pandemic rates.
  • Inflation in 2021is likely to be well above salary increase budgets.

Levanon said, “After being a nonissue in wage determination for several decades, strong inflation in 2021-22 could lead to greater demand from workers and unions for a cost-of-living adjustment in 2022.”

Salary Increases Budgets Chart

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According to the Society for Human Resource Management, “Already, inflation has resulted in a nearly 2 percent pay cut from June 2020 to June 2021, despite modest gains in hourly wages, according to the U.S. Bureau of Labor Statistics. Consumer prices rose 5.4 percent in July 2021 from a year earlier, the same pace as in June, the highest 12-month rate since 2008, the Department of Labor reported on August 11. PayScale, a compensation data and software firm, released its second quarter 2021 PayScale Index in July, showing that wages are rising 0.6 percent quarter-over-quarter and 2.6 percent year-over-year.”

The plunge in consumer sentiment data for July was attributed to rampant inflation pressure, a spike in consumer credit balances and the steep decline in the personal savings rate after America went on an early summer spending binge. Before the September 22 FOMC meeting, investors and the Fed will get data on August PPI, CPI, Wholesale Inventories, Empire State Manufacturing, Capacity Utilization, Industrial Production, Retail Sales, Initial Claims, Continuing Claims, Philadelphia Fed Index, Univ. of Mich. Consumer Sentiment, Building Permits, Housing Starts and Existing Home Sales.

All are important data points, but the PPI, CPI and Consumer Sentiment are what matters most to market sentiment. The spreading of the Delta variant and the recent presence of other variants – Lambda and the newly labeled B.1.621 strains – are now prevalent around the globe and in some southern states, making the “transitory” notion of inflation more of a fleeting position in that the supply chain bottlenecks that were forecast to be undone by now are just as bad as they were six months ago.

This keeps the prices of everything elevated. The global chip shortage remains the biggest reason everything from autos to refrigerators are on back order going out to the first quarter of 2022.

Workers aren’t going to stand for negative wage growth and therefore it should be expected that further pay increases and cost of living adjustments will be expected going forward. These two forces might be self-correcting in the months ahead, but they matter now because both can impact corporate profits.

At present, third quarter guidance is bullish, with estimated earnings growth for the S&P 500 to be 29.8%. If the energy sector is excluded, the growth rate declines to 23.2%. All 11 sectors in the index expect to see improved earnings relative to Q3 of 2020. The energy and materials sectors have the highest earnings growth rates for the quarter, while utilities have the weakest anticipated growth compared to 20’Q3, so Q3 is still shaping up to be a banner reporting period, but Q4 might be where some evidence of margin pressure starts to cut into profits, forcing companies raise prices of goods and services.

Sector Revisions Bar Chart

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The market as a whole is absorbing these assumptions quite well, partly because of tremendous liquidity, continued positive fund flows into ETFs and the idea that a Fed taper is still months down the road, with some assurance of flexibility if the economy decelerates at a pace below forecast.

History favors a market with modest inflation where wages and purchasing power keep pace. With interest rates still at rock bottom levels and QE still alive and well, the trend is still our friend. Investors just have to know that the economic calendar matters more now than in the past several months.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

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About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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