Why the Fastest Wage Growth in 9 Years Spooked Investors

In this segment from Motley Fool Money, host Chris Hill and senior analysts Andy Cross, Matt Argersinger, and Ron Gross reflect on a report from the Labor Department that showed U.S. wages rose last month at their fastest rate since 2009. Hourly wages were up 2.9% year over year, a decent degree of gain that could be viewed as long overdue, given the tight labor market and strong corporate profitability.

However, Wall Street also viewed it as a harbinger of inflation, and the markets reacted accordingly. The Fools discuss who generally wins and loses in conditions like those that prevail today.

A full transcript follows the video.

This video was recorded on Sept. 7, 2018.

Chris Hill: We begin this week with the big macro. The monthly jobs report featured better than expected numbers, including the fact that wages increased at their fastest pace since June 2009, Matty.

Matt Argersinger: Yeah, that's the headliner for me, Chris -- hourly earnings up 2.9%. We've been waiting for a while for wages to really start gaining momentum. And it looks like they finally are. The highest growth in about nine years. Wages are key determiner for inflation. This is why I think it's really important for investors. If you think about it, businesses have to pay workers more. That starts to typically happen in the later stages of an economic cycle. That means, generally, companies are going to offset that by raising the price of goods and services, which spreads inflation throughout the economy.

It has a lot of consequences. One of the short-term consequences, usually, is that bond prices will sell off, yields will rise. We're seeing that, actually, on Friday. It sets the stage for more interest rates raises from the Fed, which can lead to lower stock prices, at least in the short term.

Ron Gross: Yeah, that's what I was going to say. You saw the market trade down on this great news. There's always a counter to every silver lining. Nothing can just be good. Right now, everyone's worried, including our Administration, I'm sure, about continuing to tighten monetary policy. Interest rates will rise. That could put a damper on stock prices.

Interestingly, though, the job market is so strong that there are now more open jobs than there are people out of work looking for jobs. Changing demographics, more retiring people, a declining birth rate, is really setting us up for a problem. To get to that huge 3-4% GDP number without the proper workforce, I would have to say, that's almost impossible.

Andy Cross: Yeah, the wage numbers, the growth is trending up, which is good, because it's been so low for so long. It's still below the pre-recession, pre-financial crisis days. We're not anywhere near back to where we maybe should be.

But what's interesting, I think, from the investing side, for me, is, in a marketplace of rising costs and rising inflation, you really want to be a stock investor. You don't want to own bonds. I mean, that's not a place to really be. That's going to be a tough spot for bonds. As Matty mentioned, yields are going to go up. That negatively affects bond prices. And, you want to particularly own companies that have pricing power, the ability to handle these price increases, because they are coming. Inflation is creeping up. The ability for companies to manage the price increases for one of their highest cost inputs, their product, is going to be really important for investors. Stocks are the way to go in that market.

Argersinger: Yeah. I want to end this on the good news, because I do think, to Ron's point, Andy's point -- it is nice to see workers actually have choice now in this economy. In other words, I think for a long time, workers were feeling like they had to stay with their organization. They didn't take vacation, they didn't look for other jobs, because the economy was still relatively shaky. It's stronger today, and workers are actually going out there and finding jobs and having some bargaining power.