Things that Could Trouble Investors in 2019

3rd January 2019 Off By binary
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The NYT ran a piece that mentions four factors that could be bad news for investors in 2019. While returns to investors are not my major economic concern, the piece left out what I would consider to be the biggest risk: a profit squeeze.

The low unemployment rate is finally leading to some acceleration in wage growth. The annual rate of hourly wage growth over the last year has been 3.2 percent. Taking the average of the last three months (September, October, and November) compared with the prior three months, it has been 3.3 percent. While this is still not terrible fast, it is up from 2.5 percent through most of 2017.

Suppose that wage growth edges higher in 2019 to 3.7 or 3.8 percent, hardly an absurd proposition. Productivity growth has been averaging around 1.2-1.3 percent. (The job-killing robots are still hiding from the Bureau of Labor Statistics.) This leads to two possible scenarios.

In the first, wage costs are fully passed on in prices. We would then expect to see inflation of close to 2.5 percent. If the Fed gets strict about its 2.0 percent inflation target (likely) it will jack up interest rates to slow the economy. The track record here is not good. The Fed tends to go too far with its rate hikes and push the economy into a recession. That is going to be bad news for investors, as well as the millions of workers who lose their jobs.

The other scenario is that corporations hold the line on prices, leaving inflation close to 2.0 percent. In this case, the more rapid rate of wage growth would be eating into profit margins. This is fine by me, since it means that workers would be getting back some of the share of income they lost in the Great Recession.

But stocks are not moved by measures of social justice, they response to current and expected future profits. If the profit share falls back to its pre-recession level, that will be bad news for investors.

So if folks asked me for the bad things that could happen for the stock market in 2019, this story of a potential profit squeeze or higher inflation prompted an over-reaction from the Fed would top my list. I’m surprised it didn’t make it to the NYT’s.

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