A raise in your paycheck is not best thing for your stock prices
Who doesn't like getting a raise, right?
It gives you the confidence to buck up for some of those simple pleasures in life that had previously seemed a little too extravagant, like that $666 burger or that $1,000 sweater vest you had your eye on.
As such, accelerating wage growth is generally considered a good sign for the economy and, by proxy, the stock market.
Strategas Research Partners, however, would beg to differ on that last part. A chart out from the firm's Chris Verrone and Todd Sohn shows an inverse relationship between wage growth and returns in the Standard & Poor's 500 index the following year.
An increase of 2.2 percent in wages for December following an average gain of 2.05 percent in the first 11 months of 2014 has been good for an average one- year rally of 10.7 percent in the S&P 500, according to Strategas. The returns are based on data going back to 1965. Of the 146 instances of wage growth in this range, 85 percent of them were followed by positive returns in stocks.
Inverse Relationship
So wage growth at this level is pretty good for equity prices. Even weaker growth is better: stock-market gains jump to 15.3 percent in the following year when wages increase from 1 percent to 2 percent, with the S&P 500 advancing 94 percent of the time.
The better the wage growth is, the lower the returns. Growth from 3 percent to 5 percent led to S&P 500 gains of less than 8 percent, with positive returns only about 70 percent of the time, according to Strategas. When average hourly earnings growth is above 5 percent, the returns drop to 4.3 percent with market gains only occurring 60 percent of the time.
It all sort of makes sense when you think about what happens when wage increases accelerate - corporate profit margins come under pressure and, in the current situation at least, the Federal Reserve has been watching for a pickup in wages as one of the indications the economy is strong enough to handle an increase in interest rates.
To anyone who's ever managed a payroll, this may be preaching to the choir.