This Is the Real Reason the Markets Can't Head Any Higher

I freely admit that I love polls. While there's no way of excluding all biases from polls, they give us a taste in its truest form of what the American public is thinking about and what issues matter most.

One report in particular that came out last week and that always grips my attention is the State of the American Workplace. This poll, conducted by Gallup using data collected over a two-year period from 2010 to 2012, seeks to establish the amount of employee engagement that workers demonstrate toward the companies they work for. The findings of the study were both shocking and expected at the same time. 

The real reason the markets can't head higher
Of the roughly 100 million working people in the U.S. who held full-time jobs during the study, about 30 million (30%) are considered engaged and inspired at work, while 52 million (52%) are not engaged -- essentially going through the motions -- and 18 million (18%) are considered actively disengaged and basically loathe their work environment. Running the math, that's 70% of the U.S. workforce that is in some way uninspired about their job and has little interest in seeing productivity or efficiency at their company improve. This is the heart of the problem why the Dow Jones Industrial Average (^DJI 0.06%) and S&P 500 (^GSPC -0.22%), which both hit all-time record highs this year, simply can't head any higher.

A few companies are getting it right
You might think worker apathy isn't a big deal, but, according to Gallup, worker disengagement can affect U.S. businesses bottom lines by costing companies anywhere from $450 billion to $550 billion, annually. You may have also heard the phrase before that "a happy worker is a productive worker" -- well, Gallup now has statistical evidence proving that to be true.

Source: Mark Hyre, commons.wikimedia.org.

In 2010-2011, workplaces that had a high number of actively engaged workers -- in its study, 9.3 engaged workers per every disengaged worker -- delivered earnings per share that was, on average, 147% higher than its peers. The reason is that a happier workforce is more innovative and more efficient and has fewer accidents. Furthermore, allowing engaged employees to work to their strengths rather than forcing them into a specific role in the company significantly reduces stress and other chronic diseases, which can drastically lower health-care costs.

One fantastic example is Internet search giant Google (GOOGL 0.35%). You'll be hard-pressed to find a company that does a better job at getting more out of its employees with regard to innovation than Google. However, much of that stems from fantastic compensation packages and a sea of unique perks that you'll find nowhere else. With Google shares up 778% since they debuted on the Nasdaq nearly nine years ago, I'd call that quite a success.

Source: George Kelly, Flickr.

... But many are getting it oh-so-wrong!
But, based on Gallup's lopsided figures, it appears for each company that's getting it right, there are countless more coming up short. Utilizing the same example above, in workplaces where there were as few as 2.6 engaged workers to every disengaged worker, earnings per share on average fell 2% relative to their competition.

Multiple factors go into determining whether or not an employee is engaged, not engaged, or actively disengaged. Some, listed by Gallup, include whether or not a company is hiring or downsizing, whether employees are being worked to their strengths, and even which industry an employee works in.

The last factor of industry is particularly intriguing because front-line service-oriented jobs, such as retail, are among the lowest in terms of creating active job engagement. Take Sears Holdings (SHLDQ), for example. Sears has been downsizing its stores and has reduced many of its workers' hours below the full-time threshold to ensure it's primarily exempt from the prospect of a penalty once the Patient Protection and Affordable Care Act, also known as Obamacare, goes into full effect on Jan. 1. With relatively low wages and seeing the company struggle with layoffs, it's no wonder that only 30% of the 1,242 reviews on Glassdoor would recommend Sears to a friend as a place of employment.

Another not-so-shining example is Hewlett-Packard (HPQ -0.25%), which is in the process of laying off 29,000 workers to reduce expenses by $3.5 billion annually. HP has also struggled in the innovation department, languishing under weak PC sales while falling behind many of its peers with regard to its cloud transition. Similar to Sears, HP's Glassdoor recommendation rating by all employees stands at only 43%. With little hope of advancement and stagnant wages until the layoffs are complete, HP's management team certainly has a challenge ahead of it with regard to bottom-line growth.

We lack the innovation to push forward
While there are clearly some companies changing the competitive landscape and driving innovation in their sectors, this Gallup poll demonstrates just how many companies are being held back by apathetic workforces, or, even worse, workers who would rather undermine their company than help it succeed. It's practically impossible to get behind a scenario that sees the Dow Jones and S&P 500 heading higher in the absence of the Federal Reserve's QE3 when the basic tenets of productivity growth don't appear to be all there.

If you've ever wanted a reason to be skeptical about this market rally, I don't think you need to look any further than the overall engagement of the nation's full-time labor force.