Will “missing workers” start to weigh on US stocks?

Morgan Stanley Wealth Management


Summary: Labor shortages in the US may not be so temporary, with significant implications for inflation, monetary policy, earnings, and stocks.

America’s labor-market dynamics are baffling employers, policymakers, and investors alike. Take the latest job openings and labor turnover report from the Department of Labor. A record 4.3 million workers quit their jobs in August, while the number of job openings—down slightly from its July record—stayed stubbornly high at 10.4 million, even as some five million workers remain unaccounted for, compared with pre-pandemic levels.1 

The shortfall has left many businesses scrambling—and many experts asking: Where are the workers and why aren’t they working?

Financial market bulls may see these conditions as temporary, related to lingering concerns around pandemic risks, resistance to workplace vaccine mandates, or the overhang of expiring extended unemployment benefits.

Yet, Morgan Stanley Wealth Management thinks that these developments represent a labor market undergoing structural changes that could affect inflation, supply chains, monetary policy, and the stock market.

More immediately, today’s labor shortage has chilled business sentiment, sending September’s reading of the US National Federation of Independent Business’s index of small-business optimism to its lowest since March. Among surveyed business owners, 51% reported job openings they couldn’t fill, a third-consecutive monthly record. An unprecedented 42% of companies said they have raised compensation, and 30% plan to raise pay over the next three months. And, you guessed it, that’s a record, too. 

Why this scarcity of workers? First, consider how the workforce has contracted during the pandemic. At least 200,000 among the more than 750,000 COVID-related deaths in the US belonged to the eligible working population, according to Centers for Disease Control and Prevention estimates.2 Meanwhile, another part of the population may be experiencing “long COVID” symptoms that keep them from full-time work.

Then factor in accelerated retirements. Analysis by Morgan Stanley Chief US Economist Ellen Zentner shows that about two million more people exited the workforce due to retirement than demographic trends would have predicted.

Workers themselves have adjusted to many changing attitudes and behaviors around work that have given them more leverage. In particular, “white collar” employees who were able to work remotely during the pandemic now realize they can work from anywhere. Meanwhile, “frontline” workers who faced elevated stress and health risks throughout the pandemic, often in poor working conditions, now demand better wages and benefits. 

Then come the so-called nonessential sectors. This category, which broadly covers recreational and service businesses, faces a particularly acute labor shortage, as its workers switch careers, fueling a surge of retraining and career repositioning, enabled by online learning and professional certification options, as well as a push toward the gig economy and entrepreneurship.

All of these factors suggest a metamorphosis of the US labor market that will likely push up wages—as evidenced in the small-business data—which in turn could further fuel inflation.

This is important not only for monetary policy, but also for company bottom lines and stock markets. Labor costs comprise a significant portion of corporate balance sheets—more than 54% of S&P 500® companies’ expenses. This strikes at the heart of many investors’ bullish view toward equities, based on the belief that strong earnings growth will continue to power returns. 

Takeaways: Keep an eye on wage growth and inflation metrics, as persistently higher wages and costs may pressure corporate profit margins and earnings growth momentum. Consider balancing stock selections between capital-intensive and labor-intensive businesses. Morgan Stanley Wealth Management favors financials and energy vs. consumer staples and healthcare, and believes consumer discretionary and technology sectors continue to look expensive.

For investors, diversification and a long-term perspective remain the foundation of a portfolio equipped to ride out uncertainty. 


The source of this Morgan Stanley article, Will “Missing Workers” Start to Weigh on U.S. Stocks?, was originally published on October 20, 2021.

  1. US Bureau of Labor Statistics, Job Openings and Labor Turnover Summary, 10/12/21, https://www.bls.gov/news.release/jolts.nr0.htm
  2. Morgan Stanley Wealth Management, Global Investment Committee Weekly report, “The Great Resignation,” 10/18/21

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