June 14, 2015

The broader stock market has been on a continuous upswing since November 2012 when the weekly close of the SP500 index briefly broke below the 48 week average.  The past six months is one of those periods when investors seem undecided.  Even though the market is above its 24 week average, a positive sign, it closed at the same level that it was just before Christmas.  Earlier this week came the news that Greece might avoid default on its June payment to the ECB and the market surged upwards. At the end of the week, news that talks had broken down caused a small wave of selling on Friday morning. Investor reaction to what, in perspective, is a relatively small event, indicates an underlying nervousness in the market.

As the SP500 began a broad upswing in late 2012, the bond market began a downswing.  A broad aggregate of bonds, AGG, fell about 5% over the following ten months before rising up again to those late 2012 levels this January.  In the past five months, this bond index has declined almost 4% as investors anticipate higher rates. A writer at Bloomberg notes a worrisome trend of concentrated ownership of corporate bonds.

Retail sales in May showed strong gains across many sectors in the economy. As the chart shows, growth below 2.5% is weak, indicating some pressures in household budgets that could be a precursor to recession.  Current year-over-year growth in retail sales excluding food and gas is up almost 5% – a healthy sign of a growing economy.

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Wage Growth

“Since 2009, when the great monetary experiment began, global bond markets have increased in value by about $17 trillion. Global equity markets have increased by about $40 trillion. The average worker has seen wages increase by about $722 billion, which means about 2% of the benefit of QE (quantitative easing) went to workers. The rest went to asset prices.” (Source)

A cross section of a tree shows a historical pattern of rainfall, temperature and volcanic activity.  Wage and salary income across a population can provide a similar historical picture of the economic climate of a people.  The recovery from the recent recession has been marked by slow growth in wage and salary income relative to the growth rates of previous recoveries.

Economists find it difficult to reach a consensus to explain the muted growth.  A WSJ blog summarized a number of explanations.  I have noted several of these in past blogs.  They include:

Slack in the job market.  However, the labor dept reports that the number of job openings is at a 15 year high. (BLS Report)

Some economists point to the large number of involuntary part timers, those who want a full time job but can’t find one, as an indication of slack in the labor market.

The number of people quitting their jobs for another job is improving but is still weak by historical standards.

Sluggish productivity growth. Multi-factorial productivity growth estimates by the labor dept show that productivity gains in the past 15 years are chiefly from capital investment, not labor productivity.  Capital productivity during the recovery has been slow but labor productivity has been terrible, according to multi-factorial productivity assessments by the BLS.  As the century turned, we applauded the transition toward a more service oriented economy.  Less pollution from manufacturing industries, we told ourselves.  “The service sector is less cyclic,” economists reminded us.  It is much more difficult to wrest productivity gains from many service sector jobs. The cutting of a lawn, the making of a latte – there is a minimum threshold of time to do these things.

The sticky wages theory: namely, that companies withhold raises during the recovery because they couldn’t cut wages during the recession.

Let’s compare income growth to retail sales growth, using the data for retail sales less  food and gas whose prices are more volatile.  Periods when both growth rates decline set the stage for recessions.  Periods when both rates increase mark recoveries.

Simultaneous declines in 2011 and 2012 prompted stock market corrections.  The upswing of the past two years has contributed to the rising stock market.