Daily Bullets……for August 19, 2014

·        “A million miles from full employment”…..This article focuses on the fact that real (inflation-adjusted) wage growth has been virtually zero during this economic recovery and the worst wage performance of any recovery since WW2. The quote is from a Dartmouth econ prof commenting on the fact that while the highest 20% of income earners have seen growth in income(partly through holding stocks with rising dividends), the bottom 20% have actually experienced a decline in wages.

What’s the point? It has been evident for years that wage growth during this recovery has been very weak. This is contributing to the sluggishness of the current economic recovery. The Federal Reserve has made wage growth a key indicator for setting monetary policy. The irony is, to the extent the Fed keys on this, it implies continued accommodative monetary policy and low interest rates for a very long time. Why? Because we believe there is little pressure for an acceleration in real wage growth any time soon. To the extent wage growth remains subdued and interest rates remain low (which we expect), it perpetuates an environment of “income austerity” which, in part, is driving dividend-paying stocks higher as investors seek income and rising dividends. We expect this to continue for the foreseeable future. Link: http://money.msn.com/business-news/article.aspx?feed=BLOOM&date=20140819&id=17868477

·        Subdued inflation continues…..Labor Dept reported CPI for July, which was again a subdued number. Headline inflation of 2.0% remains in line with trend rate of the past several years. “Core” CPI came in at 0.1% m/m and 1.9% y/y, which is below the Fed’s target range of 2-2.5%.

What’s the point? This is another subdued reading and indicates inflationary pressures in the economy continue to remain muted. It correlates with our comments above pertaining to wage pressures. We believe the overall inflation environment and subdued wage growth is not conducive to major changes in Federal Reserve policy. We believe the implications of this are favorable to both bonds and stocks, but more so for stocks because of moderate valuations and ability for stocks to raise dividends (income to investors). To the extent companies can capture growth through rising sales and earnings, and pass this on in the form of dividends, we believe it will continue to favor stocks over bonds. While stocks appear to be fairly valued on the basis of absolute measures (price-to-earnings), they remain quite undervalued relative to bonds and current bond yields, an important aspect of the current environment, and another reason why stocks could continue to surprise to the upside despite concerns over valuation (which we share). Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140819&id=17867963