We Could See a Return of the Wage/Price Spiral and Markets Aren't Ready
Investors are interpreting almost every data point in the most optimistic light but stagflation could be more likely.
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Investors continue to take in every significant data point with a "glass is 80% full" mentality. This, in turn, continues to drive equities to new all-time highs.
Friday’s better than expected September BLS jobs report beat the consensus by a bit over 100,000 positions, igniting a nice rally that allowed all three major indexes to end barely in the black for the week. The Russell 2000’s 1.5% gain on Friday could not salvage a winning week, however.
It should be noted that monthly BLS jobs reports have consistently been subsequently revised down in subsequent updates over the past two years. In addition, the original projection of job growth from March 2023 to March 2024 was whacked down by 818,000 positions or 31% by the BLS late this summer. It also should be noted that the entire "beat" in September was from a surge of hiring in the government sector. Private sector employment was pretty much in line with the consensus.
Investors seem content to ignore that the "strong" employment report backed up interest rates and the yield on the 10-Year treasury rose 11% to end the week a bit over 3.96%. This morning, the 10-year moved over 4% for the first time since August 8. Wasn’t the premise of a good portion of the rally equity in recent months based on the promise of lower interest rates? Not surprisingly, home building stocks sold off during Friday’s rally with the SPDR S&P Homebuilders ETF XHB falling just over 1.3% on the day.
The rally on Friday was also bolstered by a major dock workers' strike being averted in its infancy before it could cause significant damage to the global supply chain. However, striking workers were given better than a 60% raise over six years. Obviously, this is much, much higher than the rate of inflation.
Administration officials also pressured port operators to close a deal quickly to avoid any sort of supply disruption before the holidays and, as importantly, the upcoming election. Talks around items like automation will continue in the coming weeks but most of the port operators leverage was taken away with the agreement on wages. This means higher transportation costs in the months and years ahead for much of the freight and goods that comes into the country.
It also probably gives some leverage to the striking machinists at The Boeing Company BA, who have been off the job for weeks. All this points to what used to be called the wage/price spiral back in the late '70s when was the last time the U.S. experienced a significant bout of stagflation. This is a forecast that looks more and more likely to me as we close the books on 2024 and commence 2025.
Therefore, I continue to be cautious around the overall markets, as they are in no way priced for a stagflation scenario.
I also continue to interpret new economic data, not with the rose-colored glasses that most investors appear to have on at the moment, but with a skeptical eye. I approach the equity market right now much like the incoming hurricane Milton that has Florida in dead aim. The quickly strengthening storm is supposed to hit the west side of Florida and come through the state north of me here in Delray Beach. I hope that indeed is the case. However, that doesn’t mean I don’t have the SUV packed and ready should my Golden Retriever Mateo and I need to head south if that projection changes quickly.
At the time of publication, Jensen had no positions in any securities mentioned.
