(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
The S&P 500 (SPY) and Dow Jones Industrial Average (DIA) may be about to get a boost, and it just might come from rising wages. The latest non-farm payroll numbers for September showed a loss of 33,000 jobs due to the impact of Hurricanes Harvey and Irma. Previous estimates had called for a gain of 100,000 jobs, according to Bloomberg.
The most critical piece of data that came in the release was the rise in wages, which grew by nearly 3 percent versus the same period a year ago. (See more: September US Non-Farm Payrolls Decline by 33,000, Earnings Growth Jumps To 0.5%.)
The S&P 500 has already risen by nearly 14 percent on the year, while the Dow has risen by 15 percent. If consumers earn more, it means they will have more money to spend. Consumer spending makes up about two-thirds of the U.S. gross domestic product (GDP), so increasing wages could drive GDP growth and growth in corporate profits. The increased spending would help boost revenue, which could lead to increasing corporate profits if costs and margins remain stable.
Rising wages have been one of the missing pieces in the economic recovery after the financial crisis. This has been one of the areas the Federal Reserve has kept a close eye on.
The Bureau of Labor Statistics' latest employment report showed that average hourly wages rose by $0.79 from a year ago, to $26.55. Rising wages could be an essential boost to equities prices because it could finally give consumers extra money to spend, thus boosting corporate earnings.
In the chart above, we can see the surge in hourly wages over the past few months. Rising wages are an essential component to the health of the labor market. The wage increase could give the Federal Reserve a signal that the labor market is getting tighter and finally causing employers to pay employees more, helping to boost inflation.
After years of falling, the labor participation rate has finally troughed and appears to be rising again. This indicates that more people are working, with a shrinking supply of potential eligible employees. Fewer qualified workers could mean companies may be forced to pay more to attract top talent.
Rising wages will also help boost inflation, which has been a significant concern for the Fed over the health of the U.S. economy. Should salaries continue to rise, it makes the reflation trade that started in the stock market after the 2016 presidential election more viable.
Consumer discretionary stocks could be one of the major beneficiaries of increasing wages. People, in general, will have more money to spend on those items they desire, or to repay debts.
Overall, rising wages are good for the U.S. economy and the stock market. It has been the missing pieces of the post-recession growth story. If consumers start coming back due to rising wages, it could have a massive impact on the economy and on stock prices.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.