Dividend yield: 2003 is TIBAX and 2004-2019 is TIBIX.
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Not necessarily the Fed, whose own research suggests wage growth is not a reliable indicator of future inflation. But markets, it appears, aren’t sure what to think.
♩ Hey Mr. President – All your congressmen, too – You got me frustrated – And I don’t know what to do – I’m trying to make a living – I can’t save a cent – It takes all of my money – Just to eat and pay my rent – I got the blues – Got those inflation blues ♬♫ – Inflation Blues – B.B. King (1983)
U.S. jobs and particularly wage data in February sparked a global selloff in equities, although stocks have since clawed back a little ground in volatile trading. Fears about the pace and extent of benchmark interest rate tightening ahead have continued to whipsaw markets, and not just in equities, but bonds and foreign exchange as well.
Market swings, of course, are nothing new, but the standard assumption that wage growth drives inflation shouldn’t be taken at face value. At least a handful of U.S. Federal Reserve bank presidents and the economists they task with economic research certainly don’t.
Inflation, it turns out, may help predict wage growth, which on a seasonally adjusted annual basis hit 2.9% in January 2018. U.S. headline inflation last month hit 2.1%. If inflation does drive wages higher, it will no doubt be a welcome development for lower- and middle-income workers, who have seen years of tepid wage growth. It’s too early to say that wages will grow sustainably from here. But, the December tax reform means businesses will have more money to spend on workers, who with a 4.1% unemployment are likely getting harder to find.
Lower income tax withholding also means workers will have more to spend. And with consumer confidence, as measured by the Conference Board, running at an 18-year high, less tax withholding coupled with any continued wage growth should prove a tailwind for inflation, if consumer demand for more goods and services does rise. Time will tell if a cyclical feedback loop supporting the “wage-price spiral” you may have read about materializes.
Several Fed policymakers have recently downplayed the notion of higher wages translating into higher prices:
The Federal Reserve’s own research provides insight to why some regional Fed presidents don’t align with the “wage increases boost inflation” scenario. DataTrek Research compiled the following examples:
Inflation is full of mysteries, but this shouldn’t be a surprise. Economies are complex systems, and the interaction of multiple variables can lead to less-than-intuitive results. In today’s markets, which appear to be more driven by narrative than data, it’s important to build robust portfolios that are sufficiently diversified and don’t depend on singular macro bets based on forecasts for growth, inflation, deficits, etc. Over the long-term, all-weather portfolios built with carefully selected individual securities offering attractive risk-reward propositions and differentiated exposures should deliver better results.