This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Thursday, January 20, 2021
3 trends, all connected to (or by) inflation
It’s still early days, but the raft of fourth quarter earnings thus far, though mixed, have mostly surprised to the upside. As of Friday, only a slim 19% of S&P 500 companies that have reported earnings have undershot Wall Street estimates, according to Refinitiv, with earnings running 8.3% above expectations.
Despite the behavior of Wall Street — where the Nasdaq closed in correction territory after a rough start to 2022 — Q4 results thus far are testament to how strong demand remains, even as the Omicron variant cascades across the global economy. The market’s winter of discontent aside (Santa Claus appears long gone, headed back to his COVID-19 free redoubt at the North Pole), the state of corporate America’s balance sheet remains strong.
With that out of the way, this week’s spate of results allows the Morning Brief to indulge in one of our favorite parlor games, which is to connect the dots between disparate bits of news.
In this case, at least three pivotal themes have emerged, and it may come as no surprise that they’re all connected to our current inflationary moment. Here’s what we can say thus far:
Wages are going up, up, up…:
The deep pocketed bankers at Goldman Sachs (GS), Citigroup (C) and JPMorgan Chase (JPM) have all hiked pay for their employees, in part to keep them from taking their leave during The Great Resignation. Moreover, all have expressed a willingness to keep doing so, with the possible exceptions of Morgan Stanley and Bank of America, which as Bloomberg News pointed out, appeared to hold the line on compensation (at least this time around).
But as Yahoo Finance’s Brian Cheung pointed out this week, higher pay to retain and attract employees took a toll on Goldman Q4 profits, and CEO/part time DJ David Solomon warned wage inflation was “everywhere in the economy.” And as the Morning Brief has told readers for months, pay hikes contribute to price pressure.
2. …Which makes consumers comfortable paying more (even if the Fed isn’t)...:
Two of the biggest names in business — Netflix (NFLX) and Procter & Gamble (PG) — have recently hiked prices for their customers. As for the former, Yahoo Finance’s Allie Canal reported on Wednesday that Wall Street is increasingly bullish on the streaming giant, in part because of its confidence in passing the costs of content creation along to subscribers.
Meanwhile, P&G is enjoying yet another moment in the sun, with demand for cleaning products surging in the wake of Omicron. CEO Jon Moeller told Yahoo Finance’s Brian Sozzi that consumers are putting up little resistance to price hikes, even though the company may take a pause before raising them again.
Taken together, it shows how corporations are reveling in their pricing power, and consumers with fatter wallets are eating those hikes with little complaint. While it pains us at the Morning Brief to be the ones to say we told you so… we kinda did months ago.
3. ...and WFH is here to stay, which indirectly boosts inflation:
The future of work is clearly weighted toward the side of working remotely, which is creating distortions in the economy that highlight the inequalities that exist between the hourly wage earners and knowledge workers.
Nevertheless, the work-from-home craze spurred BlackRock (BLK) CEO Larry Fink to declare that the old world of work is over, most likely for good.
"Companies expected workers to come to the office five days a week. Mental health was rarely discussed in the workplace. And wages for those on low and middle incomes barely grew," the billionaire wrote in his annual letter, as pointed out by Business Insider. "That world is gone."
Indeed. Amid the Omicron surge and the dangers of new potential variants — remote/hybrid work plans for companies are more popular than ever, Yahoo Finance’s Thomas Hum wrote this week. According to Conference Board chief economist Dana Peterson, chief economist at The Conference Board, the U.S. “is looking at a permanent hybrid situation,” with over a third of CEOs expecting some form of WFH for the foreseeable future.
That leads to higher housing costs in high-demand areas (you guessed it – we told you that one already, too), and more well-compensated knowledge workers shopping online. More demand, higher prices.
Editor's note: We want your feedback. Please take this quick survey to let us know if we should launch another newsletter. If the answer is yes, what type of content should the newsletter include?