This Threat Could Mean Disaster for the Bull Market in Stocks

Wednesday brought another bout of volatility to the stock market. Market participants were initially upbeat, but throughout the day, investors seemed to lose their optimism about potential future gains. By the end of the day, the Dow Jones Industrial Average (^DJI 0.67%), S&P 500 (^GSPC 0.87%), and Nasdaq Composite (^IXIC 1.11%) were all down, with the S&P 500 having pulled back from what might have been a record closing.

Data source: Yahoo! Finance.

Nearly everyone had seemed to take for granted that after the huge disruptions to the global economy throughout 2020 due to the COVID-19 pandemic, 2021 would inevitably be a year of sharp recovery. It's certainly the case that there's plenty of pent-up demand in certain areas of the economy that were shut down for much of the past year. Yet a new threat that few people had accounted for appears to have reared up, and it's making economists start to question whether the recovery will be as strong as everyone had assumed it would be. That, in turn, could bring the bull market to  a crashing halt.

Image source: Getty Images.

Are tight labor markets hamstringing businesses?

Employment trends are one of the most important factors that determine the course of the economy. When many people are unemployed, as occurred early in the pandemic, it can spell financial disaster. That was the primary motivation for the massive government assistance packages that came in multiple rounds over the past year. As businesses laid more people off due to shutdowns, the massive threat to the economy warranted a proportionate response.

Now, the economy is generating new jobs to put people back to work. Unemployment rates have fallen substantially. Yet the new threat facing businesses is finding enough people to hire as economic opportunities expand.

Many workers have decided to leave their jobs, taking advantage of a tight labor market to find better positions elsewhere. Others still aren't in a position to return to work because of child care or health and safety concerns. Even decisions from some states to bring extra unemployment benefits to an end haven't yet resulted in a substantial uptick in people returning to work.

Businesses at risk

The impact of tight labor markets is stronger on some industries than on others. Those areas that have traditionally paid lower wages are struggling the most in many ways. On Wednesday, fast-casual restaurant chain Chipotle Mexican Grill (CMG 0.53%) said that it would boost the prices on its menu, in part to provide more money to boost employee wages for workers in Chipotle's restaurant locations. That includes a boost to average hourly wages to $15 by the end of this month, as well as referral bonuses for those bringing new workers on board.

The move follows similar actions by other players in fast food. McDonald's (MCD 1.32%) said last month that it would boost hourly pay by roughly 10% on average for tens of thousands of employees. Fast-casual specialist Darden Restaurants (DRI 1.34%) has also hiked its wages.

Nor is the labor shortage limited to restaurant work. Other companies outside of that industry have also boosted wages in an effort to attract new workers and retain existing ones.

Higher wages for lower-paid workers can have a positive impact on the economy. But if workers aren't taking jobs in some key areas despite wage increases, then labor shortages can lead to shutdowns, which in turn could make the economic recovery fall short of hopes. Given how high investor expectations have been, that could prove problematic for the bull market to continue to run.