It is one thing to read about the extraordinary jobs boom that is taking place in the United States.
But it is quite another to visit there and see for yourself what a 3.7 per cent unemployment rate with 711,000 new jobs created in October alone looks like.
It was also instructional to see on the ground how hard fought the US mid-term elections were, with the result that President Trump’s Republicans lost their House majority but strengthened their hold on the US Senate.
We would expect that result to temper the ability of the Trump Administration to push ahead with the more controversial parts of its plans, potentially reducing the heat in the emerging trade war with China.
That sort of “do less” approach is actually good news for the US share market, which rallied after the election results after a shocking performance in October.
In nearly all of the US retail stores I visited last week there were “We are hiring’’ signs and everywhere you look there are indications that unemployment is almost non-existent.
Many quite elderly and retired people have been lured back into the workforce to fill the gaps many companies are experiencing.
It was this sort of competition to find and retain staff that drove online giant Amazon to pay all of its casual and part-time workers a minimum of at least US$15 an hour – more than double the actual minimum wage in the US.
When the second largest US employer makes a move like that, you can be sure it will have major ramifications, the most obvious one being that after many years of stagnation following the GFC, wages are on the rise again.
The scramble for employers to find qualified workers looks set to continue as well, with a US record number of 7.14 million open jobs.
Where prices go, wages will follow
When we try to look ahead at what might happen to the Australian share market, we need to make a prediction about what is happening in the US, which is not just the world’s biggest economy but also home to the world’s largest and most influential share market.
And my prediction is that inflation – which is a measure of prices – will begin to pick up in the US after remaining low during the post-GFC slump.
With so many people working in the US and the GFC causing many US consumers to radically reduce their debts, spending across the US economy is bound to rise and keep rising.
Anecdotally, you can see this already happening with many US restaurants being very busy and full, even if they are quite expensive by Australian standards.
Interest rates rises will continue to rise
In my view the major take away from all of this is that the prospect of further official interest rate rises by the US Federal Reserve should be regarded as locked in now.
While President Trump might rail and complain about the Fed raising rates, the fact is that in an environment of strong employment and rising prices and wages, it would be highly irresponsible not to continue to normalise interest rates after they have been so low for so long.
Indeed, if there is a risk to the US economy at the moment – part from the obvious trade wars – it is that interest rate rises might get “behind the curve’’ and allow inflation to grow too quickly.
To counter that risk it is possible that the US Fed will actually increase the size and pace of interest rate rises in the coming year.
Higher interest rates create an investment attraction towards cash – if you can make a meaningful and risk-free rate of return from cash in the bank, that investment option becomes a real alternative to chasing potentially greater returns on the share market, which obviously carries a higher risk.
What does all of this have to do with the share market?
Well, what happens in the real economy changes what happens on the share market in the long term, even if the short term gyrations seem to be unrelated to company profits and interest rates.
In general, higher interest rates will be bad news for the US share market and by extension, the Australian share market as well.
That is why October was such an ugly month on world share markets as the realisation of higher US and European interest rates finally kicked in, along with the electoral uncertainty in the US and the continuing trade war with China.
While the fact that the Trump Presidency will likely have its power crimped by losing its majority in the House is seen as good news by US share market investors, that won’t be enough to overcome the offsetting impact of interest rate rises.
The one positive for US and Australian share markets is that corporate profits should continue to rise, as long as the shortage of workers and speed of wage rises doesn’t outstrip the impact of higher spending.
That is how share markets are meant to work, responding positively to improved profit rises produced by higher sales rather than speculative fund flows from worried central banks that are printing money to stimulate and kick start a recovery.
The recovery is now well and truly with us and as central banks continue to withdraw their stimulus and raise interest rates, successful share market investors will need to revert to buying shares in companies that are set to perform better than their counterparts to beat the market.
The good old days of shrewd stock picking being the key to success are returning and the days of grabbing an index and going for a ride on the back of central bank stimulus have come to an end.