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Wage inflation suggests no end in sight for bull market

A trader works on the floor of the New York Stock Exchange.

The count continues. It’s been 1,357 days without a 10 per cent correction for the S&P 500, bringing all of us the way to October 2011.

While that may give the bears even more fuel to reason that a pullback in equities is originating, bull markets only tend to end with recessions. And these days, a recession doesn’t turn to be in the offing.

Jonathan Golub, chief U.S. market strategist at RBC Capital Markets, noted the yield curve is typically the key indicator of the recession. However, he considers the trend in wage inflation more essential this time around.

“A clear, crisp pickup in wages may likely cause the Fed to do something more quickly, derailing the expansion,” Golub told clients. “While we\’re quite focused on this as a potential threat, the data gives us little reason behind concern.”

He believes wage growth would need to rise about 100 basis points in a six to 12-month period for this to become a problem. While average hourly earnings along with other measures of wage inflation have acquired, the strategist noted they remain contained.

Broader inflation also remains well underneath the Fed\’s 2% target, with Core PCE (the Fed’s preferred gauge) sitting at 1.2 per cent.

David Bianco at Deutsche Bank noted that the Fed’s latest step toward a slow and limited hiking cycle is the bullish case for equities investors need to look for. However, for this scenario to play out, the equity strategist noted that the labour market can’t tighten an excessive amount of and spark labour cost inflation.

“The Fed would then find itself behind the bend and need to hike faster and higher,” Bianco said inside a research note.