Weekly Update: Will you be getting a raise this year?


The melt-up continues unabated into the new year. My “crazy bullish’’ Arizona friend who was so correct over a year ago tells me he’s now so bullish he “can’t sleep at night.’’ Indeed, there is strong and consistent buying pressure in Dudack Research’s proprietary volume indicator, a characteristic of strong bull markets. Other gauges—the 10-day average of daily new highs at 184, well above the 100 per-day level defined as bullish; the 10-day average daily new lows at 28, well below the 100 per-day level considered bearish; and an advance/decline line at record highs—also are bullish and represent broad technical confirmation for further gains in 2018. History suggests the first few days of a new year tend to set the stage for the full year’s performance. Early January gains have predicted full-year gains 84% of the time for the S&P 500 and 80% of the time for the Dow. With all signs pointing to accelerating economic growth (more below), the big macro question for markets in 2018 is not so much what GDP will do but what inflation and wage growth will do. If both remain subdued in 2018, the case for a repeat of the 2017 market pattern of sideways bond yields and rising equities is much stronger than if inflation and wage growth pick up, even just gradually. So, will you be getting a raise this year?

If we are ever going to get inflation, this would have to be the year! We are coming out of the box fully employed, with a big tax cut that, by historical standards, is late in an advance. This alone would argue for inflation. During the slow holiday period, I read a lot of 2018 outlook pieces in which Wall Street clients said inflation was their biggest fear by far. So as has been the case the last six years, everyone once again is certain that interest rates are going up. The economy already was picking up steam prior to the rewriting of the tax code. A much smaller 2003 tax cut saw GDP surge and the 10-year Treasury yield jump 150 basis points to 4.6% in six weeks after that tax cut was passed. 2- to 5-year yields continue to jump, further flattening a narrowing yield curve where long-term rates remain relatively anchored, with everyone watching the 10-year hover just below the important 2.5% level. This issue was on the mind of many policymakers at December’s Fed meeting, according to the minutes released this week. Looking at history, equity markets have delivered excellent returns in the periods where the spread between the 10-year and 2-year Treasury yields falls below 50 basis points toward zero—we’re still, barely, over 50 basis points. And secular tops typically don’t arrive until 20 months after the initial cross, indicating equities may not encounter stiff headwinds until mid-2020 at the earliest.

The key will be what companies do with all that extra cash from their big tax cut (many individuals are sure to spend theirs). Will they invest in productivity-enhancing capital expenditures (capex), or just raise dividends and buy back more stock? Will they dole out raises, or pay down debt whose value is much less under the much lower statutory rate. You can’t get a sustained inflationary problem without wage inflation around 4%, which stayed stubbornly at 2.5% in today’s jobs report (more below). The biggest wage hikes have been in the lower-income cohort, which does not have much effect on a macro scale. Still, many who have studied the issue estimate that 80% of Americans will be getting a meaningful tax cut that shows up as extra pay every week. If 2018 is to be the year of euphoria in the stock market, the long-absent animal spirits will have to surface. Markets will be watching corporate guidance this earnings season as it relates to tax cuts. Various estimates have suggested they could add $10 or more to the current consensus of around $147 for the S&P (Federated’s view is a stronger $150, with an upside bias). Will you be getting a raise this year? Of course you will.


Labor markets continue to tighten While December nonfarm payrolls disappointed somewhat (more below), the 3-month average gains continued to top 200K. ADP private payrolls jumped 250K, the most in nine months. With jobless claims anchored around 250K, Challenger job cuts near 17-year lows and the number of unemployed per online job posting near a record low, the data continue to point to an environment in which employers at some point may have to pay more to lure, and retain, workers. That said, nominal wage growth tends to surpass nominal GDP growth only at the very end of a recovery, and as the latest data show, that doesn’t seem to be coming anytime soon. Currently, wage growth is running 170 basis points behind GDP growth.

Chipper consumers Car sales finished 2017 on a strong note, rebounding an above-forecast 2.1% in December and lifting sales for the year to 17.2 million units. While down slightly from 2016, the figure nonetheless represented a healthy rebound from a sluggish spring and early summer and marked the third straight year of sales above 17 million. While an Arctic blast chilled sales in the post-Christmas week, the ICSC-Goldman Sachs measure of weekly retail sales still rose at its fastest annual pace in three years, indicating the holiday shopping season is on track to be one of the strongest in recent years. The Bloomberg Consumer Comfort Index also remained on an uptrend despite slipping in the latest week, with the 52-week average reaching its highest level since February 2002.

Starting with a blast The economy appears to be getting a second wind. December ISM manufacturing surprised to the upside, nearly hitting a 13-year high as factory activity accelerated. Private construction rose at its fastest pace in six months in November, the global PMI also climbed a sixth straight month to its fastest pace since February 2011 and November exports jumped. The Atlanta Fed’s GDPNow forecast was revised up this week for Q4 2017 from +2.8% to +3.2%.


Minor disappointments This morning’s 148K increase in December nonfarm payrolls was well below forecasts, with annual hourly earnings holding at a 2.5% (although December did see a jump). The ISM services index tumbled in line with Markit’s final read on December services, which slipped to a 7-month low. And outside of aircraft orders, November durable goods orders were flat, with softness in capital goods.

Political watch A winter budget showdown looms, perhaps as early as Jan. 19—no bluffing from Congress this time, as government funding runs out. Several key issues look hopelessly gridlocked, and New York Sen. Chuck Schumer, a very big player in 2018, needs only 41 Senate votes to block action, unlike the 50-vote threshold that allowed tax reform to pass.

Global inflation watch Evidence of global reflation has been mounting, led by higher commodity prices, intensifying capacity pressures and accelerating global growth. The elevated Chinese PPI, reacceleration in various countries’ import price indexes, PMI panelists’ bullish comments (i.e., citing higher output costs, stronger international sales, increased production, capacity constraints), the delayed effect of a weaker U.S. dollar and rising alternative inflation gauges all indicate inflation may be percolating. Stronger-than-expected inflation represents the biggest threat to the market.

What else

A worry for another day Due to excessive debt in the U.S. and globally, Ned Davis Research says there is the possibility of another debt-caused financial panic akin to the mortgage debt-driven financial crisis in 2008-2009. Excessive debt can lead not to inflation, but rather deflation, and with more than 70% countries with nonfinancial debt in excess of nominal GDP, the issue is widespread. It is hard to predict which debt-heavy country could get into trouble, but China presents a major concern.

I realize he’s spooked about her jewelry theft but couldn’t he have found something more romantic? Kanye West gave Kim Kardashian a load of Disney ($100,000) and Adidas ($200,000) shares for a Christmas present. Shares of Amazon, Apple, and Netflix also were gifted, but CNBC reports that the dollar amount was not provided.

‘They told me there would be tea’ Mariah was disappointed again this year as she performed in Times Square on New Year’s Eve. “I’m going to be just like everybody else with no hot tea.” Not bloody likely.  Mariah knows what George Benson sang to us years ago, “Learning to love yourself is the greatest love of all.”  I took this to heart decades ago…Did you know that, according to BuzzFeed (shout-out to my sister Lee for the heads up!), the trendiest name in the history of the U.S. is Linda.