BlackRock's $1.9 trillion bond chief explains how everyone is misunderstanding the cause of market turmoil
- Rick Rieder, BlackRock's chief investment officer of global fixed income, says the recent market turmoil was triggered by fears that wage growth would lead to higher inflation.
- In a note shared exclusively with Business Insider, Rieder, who oversees $1.9 trillion in assets, laid out a contrasting view on how wage growth influences inflation.
- The October jobs report due Friday is expected to show that wage growth topped the milestone it hit before the recent sell-off.
There was an identical trigger for the February and October stock market corrections that hasn't gone unnoticed - at least by one expert.
According to Rick Rieder, BlackRock's chief investment officer of global fixed income, it was contained in the jobs reports that were released just before stocks went haywire both times.
Wage growth - as measured by the year-on-year rise in average hourly earnings - topped its pre-recession peak at 2.9% in January and August.
The reports put investors on alert about the prospect of rising inflation, whether this would drive the Federal Reserve to raise interest rates faster, and the pressure that more pay would place on company profit margins.
By the textbook, companies pass on the extra cost of higher worker pay to their customers by raising prices and thereby inducing inflation. But while Rieder acknowledges the role this thought process played in both sell-offs, he thinks investors are misunderstanding the fundamental relationship between wages and inflation.
In other words, Rieder knows why stocks collapsed on both occasions, but he doesn't agree with the market's logic for selling.
"Paradoxically, wage growth is not only not inflationary, it actually can have a dampening impact on both growth and inflation in today's economy," Rieder, who oversees $1.9 trillion in assets, said in a note shared exclusively with Business Insider.
His view is that as companies raise employee wages, they can tap the brakes on growth and inflation by reining in other plans to expand their businesses.
This doesn't mean their profit margins won't be squeezed, however. Rieder acknowledges this, and contends that after nearly a decade of sluggish wage growth, the Fed shouldn't be creating policies that curtails more pay for workers.
"Is it logical to conclude that a company would only endeavor to raise prices if they were being forced to pay higher wages to their employees," Rieder asked. "If that were true it would imply that - all else equal - companies have heretofore been proactively choosing to accept a lower return-on-equity by not raising prices when possible, a clear breach of fiduciary responsibility to maximize profits for shareholders."
Wall Street could be in for another inflation scare on Friday when the October jobs report is released. According to Bloomberg, economists forecast that average hourly earnings rose 3.1% year-on-year, which would be the strongest pace since April 2009.
If this forecast plays out, the jobs report could inject another dose of fear into investors' hearts and create more volatility. But that would be missing Rieder's point about how higher wages can actually lower inflation.