Wage inflation has started. What should you do with your stocks, RE investments?
With tax cut and deregulation, we could have very strong economic growth in the next few years. Inflation will come back, all these years of monetary stimulus plus Trump’s deregulation and tax reform could make inflation steadily rise and interest rate can be a lot higher.
signaling, potentially, the end of this eight-year bull rally,” said Rich Weiss, chief investment officer and senior portfolio manager of multi-asset strategies at American Century Investments. The firm manages $179 billion. “The Fed is going to have to move the interest rates, the bond market is recognizing that this incremental economic growth will spur on inflation from various sources.”
In my formative years from 1967-1982, the stock market went nowhere , similar from 2001-2010, or 1929-1950.
We are in one of the biggest bulls ever. Surpassed only by the golden years of 1950-1967. And the 1982-2001 run
Because of when I came of age I have never been a Stock Market fan.
But also since I started buying houses in 1976 I have witnessed a 50 fold increase in BA house prices. Inflation in the 70s was great for real estate and terrible for stocks. Real estate didn’t get hit until 1980 when interest rates hit 18%. Normal rates were 6-7%. We have a long way to go before that happens.
During that time we have had four housing downturns.
Most were not caused by high interest rates.
The one in 2006-2009 was the worst ever. Caused mainly by Greenspan letting banks loan to anyone.
So now we are finally back to a normal market.
5-6% interest rates don’t bother me. But they will affect the stock market a lot more than real estate. We are in the lowest inflation market ever. Sooner or later rates will go up. A little is good… we have a long way to go before it affects Real Estate
Inflation is typically good for housing, since the cost to build new increases. That drives up the cost of existing housing. Rents increase too. Having a 30 year fixed at under 4% is going to seem like free money if inflation gets up to 4%.
The corporate tax cuts are a new variable. If companies can pay higher wages, maintain profits, and not increase prices then we may enter some very rare territory. It’d be similar to the moving assembly line in terms of improving the quality of life. It’s rare to have wages increase without price increases. It usually takes productivity gains to offset the wage increase. This time the tax cuts are acting as the productivity gains.
I’d argue this is similar to the late 90’s in terms of strong GDP growth (assuming Q1 is over 4%), low inflation, and the fed raising rates. Time will tell if the fed is smarter now. Raising rates despite the lack of inflation isn’t prudent. Historically, it takes 2.75-3.25% of increases to tip into recession.
Higher standard of living really means disposable income. Some wise consumers will buy houses and others will have more money to pay rent for nice housing. Seems a strong chance to benefit TE investors.
We have had plenty of inflation in housing even in a low interest rate environment due to housing shortages and construction costs skyrocketing
The issue now is affordablity. Rents in the BA are flat. Renters are tapped out. So wage inflation should help RE
The problem is if inflation causes a recession. I think we will need a more provocation catalyst than that to kill this bull market.
I don’t think it’s inflation that causes a recession. It’s the interest rate increases. Our economy only grows when people are borrowing money. Borrowing grinds to a halt when interest rates get too high. That causes the drop in consumer spending that causes the recession.
The fed should be leaving interest rates alone with how low inflation is.
The bond market is driving up long term rates, possibly due to weak dollar, but investors also see wage inflation which is the most important inflation…Good for real estate not so good for stocks…
I agree 100%. Usually the higher wages lead to higher prices which slows down the economy.
The new variable is the tax cut. I’m sure it varies by company, but I wonder how the cost increase of higher wages compares to the cost savings of lower taxes. I’d the wage increase is higher, then we’ll get inflation. If the tax cut is higher, then we should avoid inflation.
Thanks. This is good perspective. I started investing later than you did but I also remember double digit interest rates in the late 70s / early 80s and I look at the way housing prices skyrocketed through the 70s — even while stagflation ruled the rest of the economy.