Will Weak Wage Growth and Policy Tapering Deliver a Knock Out Blow?

Hurricane Maria has been churning offshore, threatening a combination of wind, rain, storm surge, and coastal flooding for North Carolina and much of the Eastern Seaboard of the United States. That’s on the heels of Harvey and Irma, two powerful storms that laid down a path of destruction from one end of the Gulf of Mexico to the other.

The sight of neighbors, friends, strangers, and authorities all working together in the aftermath to help each other has been heartwarming to see. That’s especially true at a time when many see the country more divided than ever.

But what about after the hurricanes fade from the headlines? What shape will the American consumer be left in? Yes, she has stockpiled supplies to get through the darkest days of the hurricane aftermath. But after the season is over, and the effects of restocking and rebuilding are priced in by the market, how is she doing? And what does her state mean to us as investors, over the medium and longer term?

Unfortunately, there could be another hurricane brewing – one that won’t show up on any weather maps. It’s an economic one that stems from the fact average hourly earnings growth has slowed to just 2.3% recently – a sign that wages haven’t kept pace with job creation.

Employers, despite a surge in confidence post-election, aren’t paying their employees much more. The retirement of higher paid Baby Boomers is also compounding the income and spending problem. As long as wage growth remains anemic, it will temper confidence and spending for the largest component of our economy, the consumer.

It doesn’t help that consumers have collectively lost interest on trillions of dollars in savings thanks to ultra-low interest rates. Instead, they’ve been forced to pour money into a stock market bolstered by the largest flood of easy money in world history. But last week, the Fed flipped the switch from Quantitative Easing (QE) to Quantitative Tapering (QT). So in sum …

The consumer isn’t seeing notable pay increases …

Her wealth is driven by moves in stock markets more than ever — moves that have largely been driven by the creation of excess liquidity among the world’s central banks …

Now, with that liquidity being drained out, a market that has been firmly “stuck” in an uptrend could get “unstuck” in a hurry!

So, this is a good time to exercise caution, and not get too aggressive chasing all manner of stocks. Use the Weiss Ratings instead to pare down your exposure, and only invest in companies at or close to the higher end of our proven Ratings Model distribution.

Don’t be afraid to raise some cash, either. That way, you’ll have the flexibility to purchase stocks on your Ratings wish list when and if they do succumb to these latest threats.

Best,

Mandeep

Small Cap Edition, By Mandeep Rai, Senior Analyst Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.