The Upside and Downside of Wage Growth

There’s no question that the current socioeconomic environment has implications for retail—albeit not only for retail. In the run-up to ICSC’s New York Deal Making conference Dec. 4-6, we’re sharing insights from Jay Quinn, senior managing director, capital markets at Faris Lee Investments. The 30-year veteran of real estate debt and equity unpacks the implications of wage growth, interest rates, the midterm elections and more.

Q: The midterm divide in control of Congress, although not unexpected, may mean a considerable slowdown in forward legislative momentum on the current administration’s agenda, including further tax reform. What are the positive, and less positive, implications of this gridlock for the capital markets?

A: While the public hopes that both major political parties work together, it is unlikely to happen. The two parties are as divided today as they’ve ever been. The most recent example of partisan politics was the contentious confirmation process that Supreme Court nominee Brett Kavanaugh went through. The Democratic Party is moving farther left, while the Republican Party is somewhat divided between conservatives and those with more moderate views. The Trump presidency has been widely criticized, deserved or not, and the country is uneasy because of all the political unrest.

The stock market historically does well with a divided Congress; the thinking is that there won’t be any new, “bad for the market” tax law legislation. Examples of this are after the midterms in 1982, when we saw a 58% upward move in the stock market. In 1986, it rose 40% after the elections; in 1998, 38%; in 2002, 34%; and in 2010, 31%.

Q: Wage growth is finally catching up with employment growth. What does this mean for fiscal policy in particular, and for the U.S. economic outlook in general?

A: While consumer prices is the largest component of inflation, wage growth is a sure sign of job growth and a strengthening economy. The Federal Reserve will closely watch this as an inflation indicator which could lead to higher rates. High rates mean higher cost of capital for debt on new acquisitions and refinancing of existing assets, which in turn will push cap rates up to make economic sense for the buyer.

The retail sector is going through some fundamental changes independent of rate movement. Higher rates will impact all asset classes, not just retail.

Q: On the subject of fiscal policy, another rate hike in December is pretty much guaranteed. Will these markets continue to price these increases in, or will further increases at the present rate eventually take a toll?

A: The Fed is moving towards its perceived “Neutral rate” of 3%. The Fed will watch inflation carefully as its main indicator for future direction of rates. They have suggested there will be three more hikes next year. Naturally, unforeseen geopolitical events could always affect rates.

Q: Trade talks between the U.S. and China could push Treasury yields higher. Are there other circumstances at work that could put upward pressure on yields?

A: Oil prices, the Mueller investigation into Russian collusion, the Democrats attacking Trump with subpoenas and lawsuits near term—all of these could have an impact on yields, and also on the pace of interest rate increases in 2019.