March Madness

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by Jason D. Norris, CFA
Executive Vice President of Research

This weekend, millions of college basketball fans will start filling out their NCAA tournament brackets. The period during this “distraction” can be economically meaningful to corporate America: it is estimated that, due to lost productivity, companies will lose a combined $6.3 billion. However, there is a bright side: 90 percent of workers believe that March Madness is good for employee morale.

While this lost productivity will not result in poor corporate earnings, estimates for the first quarter show some weakness. First quarter earnings growth for the S&P 500 is estimated to be down 1.3 percent. And while some of the weakness can be attributed to weak outlooks from a few large companies (i.e. Apple and DowDupont), a lot of it is coming from margin pressures. Wages, one of many contributors to margin pressure, are starting to affect corporate profitability, although they have yet to have a meaningful impact on inflation.

Wage Pressure Still Contained - FactSet.PNG

Source: FactSet

The chart above shows that when wage growth reaches 4 percent, a recession appears to be on the horizon. This is due to the inflationary impact of wage growth which leads the Federal Reserve to increase interest rates, thus slowing the economy resulting in a recession.

We have been surprised by the lack of overall wage growth the last few years, especially with the unemployment rate below 4 percent. There are different arguments for this occurrence, but one factor could be the mix of wage gains. Goldman Sachs analyzed wage data and found that the lower half of the wage distribution has seen most of the gains the last couple of years as can be seen in the chart below.

Wage Distribution - Department of Labor Goldman Sachs Global Investment Research.PNG

Source: Department of Labor, Goldman Sachs Global Investment Research

With healthy growth in the lower half of the wage distribution, there will be margin pressure on those businesses that employ certain workers (i.e. retail). However, the broad inflationary effects on the economy may be slower to appear.

Week in Review and Our Takeaways

  • Stocks continued their 2019 run with the S&P 500 rising over 2 percent this week

  • Even in the face of a 13 percent decline in Boeing, the Dow broke its two-week losing streak rising just under 1 percent

  • Soft industrial production data and manufacturing data resulted in a rally in the bond market and the 10-year U.S. Treasury yield fell 0.06 percent to 2.58 percent