Week in Review
Markets rallied last week as some of the geopolitical hot spots calmed slightly, and Janet Yellen’s speech in Jackson Hole (see the following page) contained no major surprises. The S&P 500 rose nearly 2% over the week and is now 9% higher on the year, including dividends. Technology stocks were the top gainers for the week, up over 2%.
Over the weekend, it was announced that Burger King was considering an acquisition of Tim Hortons Inc. The biggest concern to customers will be whose coffee will survive the acquisition.
Markets continue to focus on anticipating how the Federal Reserve will react to changes in the economy, inflation, and employment. In anticipation of the Labor Day holiday, this week’s summaries include an extra focus on the challenging interaction between investing and labor.
Setting Monetary Policy is Tough
The big event last week was Federal Reserve Chairwoman Janet Yellen’s speech at the Jackson Hole conference on monetary policy. In the speech, she pointed out the challenges she and the rest of the Federal Reserve face in deciding when to start raising interest rates. Instead of summarizing the speech, below are some of the key sentences from the speech, expressing a wide range of uncertainty.
Later in the speech, Ms. Yellen posits that wage slack may be immaterial and that rates should stay low until inflation moves; however, she then took the opposite side, saying wage changes may pick up abruptly as firms raise wages to keep employees from seeking jobs elsewhere.
What should investors take away from the speech? The Federal Reserve is flying a little blind. What is clear though, is that the 2008 downturn had more than temporary effects. The economy also continues to be shaped by forces beyond the economic slowdown. Investors should continue to be warily optimistic about the Fed’s plans. They should also prepare for bigger swings in the market as economic data points may move markets more than expected.
Happy Labor Day?
An interesting facet of this recovery has been the declining rate of employee compensation as part of GDP. Since the early 1990s corporate sector margins have expanded from around 27% to over 34%. Wages have declined by roughly the same amount, resulting in a transfer of benefits from employees to corporations and investors. Employees continue to get more productive, and the compensation they receive is increasing, but take home pay is growing at a much slower rate than output.