I believe there are two kinds of people at airports, train stations, or any other transportation that requires a ticket:

1. People who arrive early and hang out

2. People who arrive just in time to catch said plane, train, etc.

I am firmly in group #2. The airport/train station is just not my scene, even though this strategy has some risk. My partner, though, is squarely in group #1, not minding a wait to board at all, which makes for a negotiation the evening before every trip.

When it comes to markets, it feels like we have been stuck in #1 all year — waiting for one piece of data, absorbing it, and then waiting for the next one. Some of the drivers of the market's downs have been in the making for several years, some arrived this year. 

For example, we were waiting to see what’s happening with employment last week. It ended up being strong, but not too strong, with 315K jobs added, bringing the country above pre-pandemic employment. The unemployment rate ticked a touch higher to 3.7%, and it’s mostly because more people decided to look for work. It's a focus because if the labor market remains strong, the Fed has more support to keep raising interest rates and fight inflation. Meaning, they don’t have to worry as much about a slowing economy.

Employment is one area though that I see impacting investments not just this year, but further in the future. Looking back over the last 20 years, revenue and margin expansion (costs coming down so profits expanded) contributed equally to earnings growth. This was because companies got to pay less taxes, not increase wages, and access capital relatively inexpensively with historically low interest rates. Prior to the last 20 years though, interest rates were higher and labor was a greater cost. Some of that does come down to innovation and technological advances, but not all of it. Market concentration increased and we saw a rise of superstar firms. These factors diminished worker bargaining power.

Today, I believe we are in a time where old-fashioned revenue growth will drive earnings vs. the last two decades. Policy support and the rapid recovery from the pandemic have accelerated the need for employees. Interest rates, in my opinion, are likely to stay elevated relative to the last 20 years, making capital for companies and investors more expensive. Lastly, demographic trends (and lack of immigration for several years) indicate that labor will be a more scarce resource in the coming decade, as working-age population growth is expected to fall close to zero.

So what could this mean for stocks and investing? 

• A higher quality of earnings will matter, with a return to focusing on revenue and profits (since margin expansion from cost reduction could wane). Firms differ in their ability to pass higher wage costs on to customers, so looking at businesses that can do that, or those that invest to earn more, will be important.

• Firms with less labor exposure and more international earnings could also see profit margins remain at higher levels.

• Across industries, wage risks exist for Hotels, Restaurants & Leisure, Health Care Providers & Services, and Retailers — and the “I quit” rate for these sectors are the highest. Utilities, Telecom, and Energy (Oil & Gas) screen as facing less risk. 

This is not a call to buy or sell all stocks in these industries. But it’s a place to consider. 

When it comes to investing, I believe that whether you are in group one, or in group two, like me, it's how (and what) you choose on your investing journey that matters. Focusing on what a company is earning, whether that’s growing, and how much it costs them to do business (aka quality) matters more now than it may have in the past.

And following this should relieve some of the stress of travel and when you’ll arrive. 

Source: Census Bureau, U.S. Bureau of Labor Statistics, St. Louis Fed