Let's Go Old-School Lingo - Capital vs. Labor

CAMS View from the Corner

April 8, 2025

If we attempt to take a step back from the current barrage of by the minute noise and look downstream, we can, perhaps, get just a little bit of clarity.   

A barrage of noise, for my part at least, seems to be how my brain is digesting the myriad of “news” streams that sound more like indiscriminate postulating from X entity, person, or persons.

Pick your preferred point of view, but said postulating, in our current culture, is certainly filtered through the lens of whether X entity, person, or persons support the current Administration or do not support the current Administration on nearly any topic.

Said differently, actual discrimination on each topic, which can also be thought of as a non-biased, unemotional analysis of X policy initiative(s) is highly improbable in our current culture.  In fact, is this even allowed any longer? 

In light of this reality, we should emphasize our perspective, or purpose in sharing perspectives in these ongoing editions.  In other words, what backdrop context do we write and share from. 

Our contextual backdrop is we deploy capital.  For these editions, we share from that perspective.  Our emotions, or shall we say our personal views, take a distant backseat to that of “getting it right” with capital deployment decisions regardless of if we have a view that X policy is “good” or “bad.”

Through this process we share data and perspectives which are radiating from the socioeconomic landscape, market landscapes, and a host of other related areas such as monetary and fiscal policies.  We are not interested in pushing a political view by bending the data in a certain direction.  This, because we deploy capital. 

The process of capital deployment does not afford the luxury of bending data to meet a preconceived view of X political stance.  That approach easily leads to very poor performance in capital deployment.   

Under this context we have presented some editions over recent months, including recent weeks, attempting to draw attention, in a larger sense, that asset market participation could be more accurately thought of as risk market participation, and more specifically, how the stock market, for example, has been offering odd behaviors for some time.

This odd behavior sticks out like a sore thumb when you realize it was being pounded into the masses minds that we were experiencing a wonderful stock market backdrop. 

It is that “unquestionable stock market healthiness” view that motivated us to ask questions, per market-based observations, as to why X was occurring if the market had been so sound and healthy in its behavior.  We have shared snippets of our observations in these editions along the path.

The topic de jour at the moment is obviously tariffs and how the tariff topic/policy is solely responsible for the recent stock market pain. 

Circling around, we ask, if this is true, then why the strange behaviors emanating from the stock market over previous months, which, if expanded upon, can also walk us all the way back to late 2022?  Things have not been right, so to speak, which is now quite obvious.  Markets always offer signals in advance if you pay close attention.

To the casual observer, or the aforementioned indiscriminate postulating entity, person, or persons, the stock market has newfound issues in light of, and only because of, the tariff issue. 

Circling around once again, as a quick question/observation, if this is accurate, why then, since early 2021 (yes, 2021), has small-sized companies (small caps) within the stock market been absent of performance? 

They peaked in early 2021 only to struggle through the timeline to then attain, by late 2024, the level of their prior peak from back in 2021. 

In other words, they have offered no trend to point to in years.  In “things are great” times, this category posts outstanding performance results.  This has not been the case in recent years. 

This is strange behavior indeed for a market that supposedly was doing wonderfully.  The market has been subtly signaling that not all has been as good as advertised, if you will.

Will this all boil down to Capital vs. Labor?

As a general description, Capital has thrived in recent decades while Labor has struggled.

We have offered this in many editions over the years without explicitly entering into this old-school topic/debate. 

We have pointed to the many socioeconomic challenges of the everyday citizen through various data measures.  One example relates to the various angles we have shared on consumer debt generally and credit card debt specifically. 

Wages and their poor performance, when adjusted for price inflation, is another example.  There are many to point to indeed. 

There are strange socioeconomic developments pointing to this as well.  These ongoing developments underline observations shared in past editions that point to the bifurcated economic landscape in the United States.  Reduced to simplicity, think of this as the proverbial haves and the have-nots.

Just one bifurcated anecdote emanating from society comes from the International Trade Administration.  They offer that 2024 experienced an all-time record high for foreign travel by U.S. citizens. 

Simultaneous to this anecdote, food bank usage continues to hit record demand levels while the number of “food insecure” households (to use the official labeling) continues to post consistently upward trending numbers.  Both anecdotes are established and ongoing trends, not mere flashes in the pan over recent months.

The sitting Treasury Secretary recently pointed to these types of socioeconomic storylines.  He also added that the distribution of equities (think stock market) across households shows the top 10% of Americans own 88% of equities.  The next 40% own 12% of the stock market.  He then added, the bottom 50% have debt.

Most interestingly, he offered, “We have to give them (the bottom 50%) relief.”

On a personal note, I immediately thought, this elicits old-school Capital vs. Labor talk. 

Importantly, this acknowledgment, on behalf of Labor, is coming from the sitting Secretary of the Treasury.  The undertone of his acknowledgement is not offering some type of new government welfare program, but rather that the everyday household (Labor) must experience higher wages even if it is to the detriment of Capital. 

Capital?  Capital in this storyline refers to the owners of financial resources.  Underneath that, those resources can be in corporate ownership, to include stocks, machinery, buildings, etc., all of which play a role in producing goods and services. 

Labor?  This is the worker’s input via the labor they provide in producing goods and services. 

These two groups are essential to one another and are necessary for economic activity, growth, productivity, and higher standards of living.  There is also a long-standing division between the two whereby each one desires more of the economic pie.  Welcome to human nature.

As offered earlier, Capital has been thriving while Labor has not.  Like all trends, given time, they change.  This change, in the form of Labor ultimately receiving more compensation, more of the economic pie, can come in the form of reduced profit margins for Capital. 

In stock market terms, this means listed companies may be, and perhaps most likely will be, less profitable as demand for labor increases relative to the supply of labor if tariffs produce the desired result of a tremendous increase in U.S. based production.

Inflationary Pass-through Vehicles

During inflationary times, stock market-listed companies can be referred to as inflationary pass-through vehicles.  That is, a business, upon incurring higher input costs, can pass those costs through to their end consumer.  This is true as a general statement.  The details offer that this pass-through is not a certainty. 

The better question is, how much can they pass through to their end consumer before their price point is too high and hence experience reduced demand for their goods or services while also losing market share to competitors. 

This is always a delicate balance for any business as they want to maximize profit margins but not so much that they will hurt themselves via reduced demand and loss of market share.

Enter Tariffs into this Mix

All the rage relative to the tariff policy is guaranteed increased, if not spiking price inflation.  If there is any guarantee in this, it just may be that corporate profit margins will be reduced.  It is impossible to offer to what degree. 

This takes us to the delicate balance of corporations pricing their goods and services to a point of maximizing profit margins but not to a level that will crush their demand.

Tariffs can be viewed as an increased input cost.  Importantly, there is no certainty on how much of this increased “input cost” can be passed through to their end consumers. 

If X Company is sourcing goods from a foreign country and in turn offers that product to a U.S. citizen, their cost of goods sold increases with the newfound tariff.  There is no certainty that said cost can be passed on to the end consumer.  With this, general price inflation is not a certainty. 

In addition, using the extreme for discussion purposes, if they cannot pass the cost on at all, they incur a notable hit to their profit margins.  It is their margins that are in trouble, not general price inflation.

With this, price inflation may not be the certain end result as much as profit margin reduction will be. 

Logical conclusions of reduced profit margins for stock market-listed companies against a market backdrop that has company valuation levels stretched to the moon equal collective market participants running for the exits out of this logical conclusion. 

Through the lens of our Capital vs. Labor view here, Capital is potentially set up for a hit to profit margins. 

First, through the unknown ability to pass through these increased costs to their customers, and second, through the potential of Labor getting a larger piece of the economic pie, via larger wage rates, courtesy of the tariff’s incentivizing a significant increase in U.S. based production.  That is, if tariff policies produce this end result.

This is history in reverse. 

That is, dating back 30 years or more, Capital began to run wild with outsourcing globally to capture lower wage rates around the globe to boost their profit margins.  Labor, in turn, took it on the chin for the follow-on decades.  This is the extremely short version of the story.  Bottom line, Capital thrived while Labor struggled.

Importantly, we offer none of the above with complete certainty.  There are far too many variables to nail down with certainty, which is why we offered at the outset that if we push out the noise and look downstream, perhaps we can get just a bit of clarity.

Our attempt at drilling down to some clarity is through the lens of Capital vs. Labor.  They are necessarily intertwined and yet historically divisionary in their end goals.  Both want more of the pie. 

We offer that it is part of, if not the core reason for stock market participants running for the exits as they have realized that corporate profit margins are heading lower, with or without a recession. 

This, coupled with a stock market that is valued to the moon, equals a logical conclusion of tremendous concern from collective market participants. 

Labor, given time, just may be getting more of the pie after decades of struggling. 

In the ebb and flow of Capital vs. Labor, market participants may be signaling Labor is about to be getting an increased piece of the economic pie to the detriment of Capital.  If this is the case, it will not occur overnight.  It will be a process.  Through all the noise, collective market participants just may be signaling this is coming.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis