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Will Inflation Negate Expected Wage Growth?

CAMS Weekly View from the Corner – Week ending 10/13/2017

October 16, 2017

Strewn throughout recent Weekly Views has been an underlying theme of the citizenry’s experience relative to their wage and income growth rates over recent years and even decades.

Important to these observations has been the simultaneous realization that after inflation has been accounted for their wage and income growth rates have been marginal.  All told, it has left the on-going question of how markets generally can continue to escalate higher – while already highly valued when viewed through history – while citizens continue to experience low income growth rates after inflation is accounted.

The real estate market, in light of tremendous price percentage growth rates in recent years relative to income growth rates stands out in this discussion.   Through this – realizing the notable multiplier effect of this industry on economic growth – the stock market too comes into play as ultimately it is dependent on economic growth realizing the stock market is a collection of businesses.

The employment market is solid and the significant build-up of supply (people needing employment) after the 2008/09 Financial Crisis relative to the demand (businesses needing employees) played a tremendous role in tamping down wage growth rates.  Too much supply relative to demand in any market always equals lower prices, or at best, marginal price increases which speaks to the employment market of recent years.

With the consistency of employment growth in recent years we may be embarking on a time whereby the supply/demand relationship is tighter within the employment market which can equal higher growth rates of wages in the near-future.  We are watching this closely for any signs of such change.

What we are also watching closely is the inflation rate as we go forward.  The bottom line is if we see higher wage growth rates while inflation simultaneously picks up at a higher rate the citizenry will not be making much hoped for progress.


The above is a five year chart reflecting the percentage change from the previous year of two inflation measures.  The blue line is the overall Consumer Price Index (CPI) while the red line is the Median Consumer Price Index which identifies core inflation – a less volatile inflation measure.

While both measures dipped earlier in the year both have begun to curl upward recently.  Importantly the red line, while less volatile has consistently held north of the 2% area and the blue line has reclaimed this level.  These measures’ behavior over near-term months will be important as we monitor wage growth rates through the employment market.

As offered, if expected wage growth rates begin to unfold and inflation picks up simultaneously we will not be experiencing the net improvement we need to see in terms of the citizenry catching up with price growth rates in markets generally in recent years.  These dynamics play an important role in all of our lives being the impact inflation has on us once our wages are received.  We will share accordingly as these relationships unfold.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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