Encouraging inflation data propelled a big rally across markets in December, with a classic portfolio of stocks and bonds delivering its best monthly returns in years. For the quarter, large-company stocks were up 11.7% and for the year up 26.3%. Small-company stocks rose 14% for the quarter and went up 16.9% for the year. Foreign stocks surged 10.4% on the quarter and up 18.2% for the year. Bond returns for the quarter were strong, up 5.5% and up 5.2% for the year.
Rising interest rates dominated the stories of the stock and bond markets in 2023.
As rates continued rising, investors braced for a recession. The possibility was real as numerous recessions have been triggered by excessive rate increases in the past. Not since the 1970s when runaway inflation and sky-high interest rates ravaged the economy has interest rate policy so dramatically influenced the stock and bond markets as it did in 2023.
As the Fed’s campaign winds down, the markets are collectively sighing with relief. In December, both Fed and Treasury officials noted that the economy appeared to be on a path of surviving the higher interest rates without triggering a deep economic slowdown, thereby achieving the desired “soft landing.” Both the stock and bond markets surged because of this news.
Fed Chair Jerome Powell went so far as to mention possible rate cuts in 2024, a prospect relished by investors as markets may outperform during periods of declining rates. None of this is to say that circumstances couldn’t change. The Fed could hold its stance on higher, inflation-fighting rates into 2024, a twist that would be unwelcome by the markets.
Among the factors evaluated by the Fed is the unemployment rate which has remained historically low. Low unemployment is an important factor in avoiding recessions. Generally speaking, more people working means a recession is less likely to take hold. Wage growth among workers is another factor supporting economic resilience. Labor unions can be a positive force in this way as they function within the wage system to help workers gain more stability, safety, benefits, and wage growth.
The year was also very active for labor union actions. Worker strikes have long been a key point of leverage for unions. According to the Wall Street Journal, there were 354 strikes through Oct. 31 involving almost half a million workers. That’s nearly eight times the number of striking workers for the same period in 2021. Successes came with some of the largest and most powerful U.S. companies such as United Parcel Service, Kaiser Permanente, and the big-three automakers, not to mention Hollywood screenwriters and actors. Unions cited wage stagnation among the factors precipitating many of the strikes.
Wage growth is a primary means for workers to participate in the economic growth of the overall economy. Without wage growth, workers lose purchasing power to inflation, and in effect, become poorer year by year. In comparison with the years following World War II, economic growth rates in the U.S. have moderated in recent decades.
At the same time, the transmission of economic growth to wage growth for workers appears to have broken down. According to the Brookings Institution, the share of company profits going to workers has dropped from 64% in 1974 to 57% in 2017. The average rate of inflation during that period was 4.95%, as inflation was particularly high in the 1970s.
Source: Shambaugh, Nunn, Liu, and Nantz, 2017. The Hamilton Project
Wage stagnation has been a central factor in the relentless advance of income disparity, and by extension, of wealth disparity. In supporting wage growth, labor unions are performing a critical role in addressing the broad and harmful effects of wealth inequality in the U.S.
