Fears about rising inflation evaporated somewhat Friday after the payroll report showed little growth in wages. That has resulted in the return of the Goldilocks environment, in which the economy isn't too hot or too cold, says Charles Schwab's chief investment strategist Liz Ann Sonders. In a blog post, Sonders said that, excluding the market correction in February, a Goldilocks environment has been playing out for much of the recent economic expansion. And while it appeared to be ending, the payroll numbers Friday ushered it back in.
Non-farm payroll growth of 313,000 jobs was higher than the 205,000 the markets were looking for in February, but wage growth wasn't up at the same rate, lessening concerns that inflation was rising. That brought back the environment where the economy isn't too hot or too cold and thus sent stocks surging. "The muted wage gains for Main Street tend to get cheers from Wall Street because tame wage growth can keep inflation from accelerating and keep a lid on the number of rate hikes by the Federal Reserve," wrote Sonders in the blog post. The executive from The Charles Schwab Corporation (SCHW) noted that Friday also marked the ninth year of the bull market, during which time the S&P 500 Index has quadrupled.
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What's more, Sonders said the tax reform bill that lowers the corporate tax rate is boosting both capital spending and jobs growth, resulting in employment growth at levels not seen since 1984. Service employment has been decelerating, which Sonders said is normal when economic expansion is in the late stage of the cycle.
While Wall Street likes the fact that average hourly earnings were up just 0.1% sequentially in February, compared with the 0.2% consensus, it is undoubtedly disappointing for workers who are not seeing an uptick in wages. It is also not a sign that a recession is in the cards. "Baby Boomers are retiring in greater numbers – and they tend to be on the higher end of the wage spectrum," wrote Sonders. "On the other hand, Millennials are experiencing stronger job growth – and they tend to be on the lower end of the wage spectrum due to their younger age. Those forces have conspired to bias down the average."
The way Sonders sees it, the U.S. economy continues to create enough jobs for those looking for work, at the same time keeping the trend of declining unemployment going. Meanwhile, "relatively tepid wage growth" should keep inflation from rising in the near term, all of which bodes well for stocks. "For now, it's being cheered by the stock market, but a revival of frothy investor sentiment represents a risk worth watching given its contrarian tendencies," wrote Sonders.