The stock market pulled back on Thursday, with investors again focusing on the oil market for guidance and taking their lead from a 5% drop in domestic crude oil prices following a big rise in inventory levels. The Dow Jones Industrials (DJINDICES:^DJI) had fallen 34 points as of 11:20 a.m. EST, pulling back below the 18,000 mark, while broader market benchmarks were mixed. A big portion of the Dow's woes came from retail giant Wal-Mart (NYSE:WMT), which made a major announcement about its labor force that has big implications not only for the retailer but for the sustainability of the stock market's six-year bull rally.
Why Wal-Mart's pay raise matters
Wal-Mart announced Thursday that it would give pay raises to half a million of its workers during the first half of 2015 as part of a more comprehensive change to its hiring, training, and compensation programs. The move will ensure that all Wal-Mart hourly employees make at least $9 per hour by April, and Wal-Mart also committed to further increases to $10 per hour by February 2016. Managers will also see increases, with hourly pay minimums of $13 this year and $15 by early next year.
Partially in response to the announcement, Wal-Mart shares dropped sharply, leading the Dow's losers with a decline of more than 2%. Some of the decline likely stemmed from other items in the retail giant's quarterly financial report, including earnings guidance for the 2016 fiscal year that was well below what investors had expected to see. Yet given the massive size of Wal-Mart's workforce, any pay increase that affects such a large swath of its employee base will inevitably have a major impact on Wal-Mart's cost structure and further weigh on margins and earnings growth.
Many analysts immediately highlighted the potential positive impact of the move on the economy. Even as overall economic output has recovered in recent years, wage growth has lagged behind, leading some to conclude that ordinary Americans have missed out on the economic recovery. If middle-income families start to see their paychecks go up, it could spur greater consumer spending and lead to a cascading positive impact on economic growth overall.
Yet for stock market investors, the net impact of higher wages could well turn out to be negative. One of the key factors that the Federal Reserve considers in its economic assessments is inflation, and sluggish wage growth is one of the primary reasons the Fed has been reluctant to raise short-term interest rates. Even with commodity prices low, recent gains in employment have encouraged policymakers to consider removing economic stimulus, and evidence of wage growth could further convince the Fed that inflationary pressures are starting to re-establish themselves and justify more aggressive policy moves in the near future.
Long-term investors shouldn't necessarily see Wal-Mart's move as a negative, though, even if it does signal changing economic conditions that could eventually lead to the long-awaited correction in the broader stock market. Even if higher wages end the bull market temporarily, they could also set the stage for a more sustainable recovery that could eventually send markets higher still. Nevertheless, the short-term hit from labor pressures could be a theme we'll see repeat over and over again among large employers across the U.S. economy in 2015.