November 9, 2017

Stocks gapped down at the open this morning (Dow -130 pts; SPX -.55%). We’re hearing that the Senate’s tax reform plan differs materially from the House plan, and investors don’t like the uncertainty. Ten of eleven major market sectors are lower in early trading, led by tech and industrials. Remember, the tech sector is up 37% so far this year and is probably due for some give-back. Only consumer discretionary is up modestly (due to Disney and Comcast). By the way, European markets are poised to close about 1% lower. WTI crude oil about-faced and is trading up 1% to about $57.30/barrel. Bonds are selling off as yields tick higher. The 5-year and 10-year Treasury yields are up around 2.02% and 2.34%, respectively. 

Morgan Stanley just raised its forecast for oil prices. The firm now believes that global supply is not sufficient to meet rising demand over the next couple of years. Six to eight months from now, the firm thinks WTI crude oil will trade around $58/barrel. So whereas for the last year many energy analysts have said oil will trade in a range between $40 and $50, Morgan Stanley believes the range is more like $50 to $60. The firm says demand for oil is now growing at a rapid rate and US shale drillers will have to boost production to 7 million barrels per day from the current rate of about 5.9 million barrels. But are US drillers willing to do that? Morgan Stanley’s analysts say no, drillers are cutting back in order to put their finances in order. Whereas US companies are able to quickly ramp up production, they probably aren’t willing. I’d point out this is not Wall Street’s consensus view. 

Bloomberg ran an article this morning explaining why wage growth in this country is low despite the fact that we’re eight years into an economic expansion and the job market is now very tight. First, they divided up the workforce into quintiles sorted by hourly pay. In other words, the first quintile of workers has on average the lowest pay (think retail and grocery store employees). This cohort is actually experiencing a fairly strong rate of wage growth, around 4%, far better than where it was 10 years ago. The second quintile (temp employees, hotel & nursing home workers) is seeing middling wage growth of about 3% and that’s about the same as it was 10 years ago. Wage growth within the middle quintile (factory & warehouse workers, transportation & car dealer employees) is about 2.5%. This cohort hasn’t seen any acceleration in wages over the last 10 years. Moving up to the fourth quartile (hospital workers, boat/plane/car manufacturing, bank employees) are seeing nearly 3% wage growth. While that’s much better than it was a year ago, it’s still far lower than it was 10 years ago. And finally, the top quintile (employees in doctors’ offices, law, engineering & consulting firms) is faring the worst in term of wage growth at about 2.2%. That’s also much lower than it used to be. The conclusion to the study is that slowing growth in the top half—where most of the dollars are—is dragging down overall nationwide wage growth. And this trend seems to be even more pronounced over the last 12 months. So  there’s “nothing obvious” in the data that would suggest wages are poised to explode higher. According to Bloomberg, the Federal Reserve knows this, and therefore “will probably stick to its plan for gradual interest rate increases instead of stepping up to a faster pace that could put the economic expansion at risk.” 

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