Forgive our poor paraphrasing of the 1500 year-old proverb, which really just suggests you do not unappreciatively question a gift or handout too closely.  But looking at the positive action of stocks over the summer at the same time as we are seeing falling corporate earnings, downgrades to global economic growth, record high stock valuations and increased geo-political tensions does make an investor want to look a little more closely in the ‘horse’s mouth.’  Stock market volatility (as measured by VIX) is also back to multi-year lows, meaning investors are not worried at all about any of these risks. Clearly this has lead to some trepidation about the market outlook and there are a lot of prominent investors who have eschewed very bearish views on the outlook for stocks. A number of big-name hedge fund investors soured on U.S. stocks in the 2nd quarter and moved to gold and other bearish bets, failing to anticipate the stock market rally in the current quarter.  George Soros, Jeffrey Gundlach, David Einhorn, Bill Gross, Carl Icahn and David Tepper were among the billionaire hedge fund investors and money managers who slashed their stock positions, according to the recent regulatory filings of the holdings of their funds as well as their individual public comments.

But the ‘path of least resistance’ for stocks has continued to be to the upside as the market climbs the traditional ‘wall of worry’ to all-time highs.  The biggest inducement to financial market gains continues to be the perceived support from global central bankers.  While the economic impact of these policies is clearly up for debate, there seems to be no doubt that financial markets are benefitting from the ‘largesse’ of the monetary policy makers.  Investors fretted last week on what Fed Chair Janet Yellen might say in her speech Friday morning at the Kansas City Fed’s annual gathering in Jackson Hole, Wyoming.  So, what did Federal Reserve chair Janet Yellen have to say on Friday?  Well, not much, really.  While she said the case for raising interest rates “has strengthened in recent months” that was well short of the timeline that many investors have been looking for.  If and when the Fed does decide to get off the sidelines, she said, the move will be “gradual” as the Fed moves slowly into action.

It seems hard to believe that this support from low interest rates can continue indefinitely, but what is Janet Yellen waiting for to finally start the process of ‘normalizing interest rates?  After seven years of expansion and stocks at record highs, it leaves one wondering just exactly what the ‘overwhelming evidence’ is for the start of a rate hike cycle.  The original goalposts included unemployment, wealth effect (get asset prices higher) and inflation, which all seem to have moved over time.  Now, as we enter the 8th year since the end of the recession, it seems the Fed is waiting for conditions to be “just right”, whatever that means.   What might finally start to force the hand of the U.S. Fed on rates is the growing pressure from rising wages.  This trend, in the past, has been one that takes a long time to get going but, once it does, requires a strong input from rising interest rates to slow it down.  The chart below shows the trend of industries with annual wage growth greater than 3%.  It coincides closely with the interest rate cycle.  While the last increase was cut short by the financial crisis in 2008, this indicator has once again crossed the 50% level which necessitated interest rate increases in the past.   Will the U.S. Fed pay attention to this signal or continue on with their ongoing low rate policy?
U.S. Wages vs Fed Interest Rates

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