On August 24, 2021, a sign reading "Help Wanted” hangs in the window at Gino's Pizza in Patchogue. Steve Pfost/Newsday RM/Getty images
Investors are concerned about higher inflation, but Fundstrat says that one factor driving rising prices next year should be lessened.
The "Great Resignation" trend, which has resulted in millions of job openings and higher salaries, will be resisted by a surge in labor supply.
Fundstrat says these are six reasons investors shouldn't expect the "Great Reckoning" to harm stocks next year.
As millions of people leave their jobs and reevaluate their economic situation, there has been a surge in job opportunities amid the COVID-19 pandemic.
The "Great Resignation" and the subsequent shortage of labor supply have led to rising wages and in turn higher prices, as businesses rush for jobs to meet increased demand from healthy consumers.
The number of US job openings jumped to 10.9 million in July. Annual wage growth has been closer to 10% in the past few months compared to an average rate of 5% since 2014.
Investors are worried that rising wages will cause a higher structural inflation rate, which could lead to lower corporate profits and prompt the Federal Reserve to raise interest rates faster than expected.
Fundstrat's Tom Lee says that the labor shortage is temporary and will subside in the next year as more workers return to the job market.
"I have noticed that there is a general feeling among the workforce that they don't feel empowered or want to go back to work. This is just the new environment and labor will be tight. Lee stated this in a Friday note.
These six reasons are why the Great Resignation will not lead to higher structural inflation.
1. "Labor utilization is now 4.9 million lower than February 2020."
"Has the economy changed so much during COVID-19 that there are fewer people working, or a tighter labor force? Lee stated, "Nope."
Fundstrat
2. "Participation rate matching February 2020 signifies 3.7 million people seeking work."
Lee believes that the sudden drop in labor participation rates due to the pandemic may have resulted in some Americans retiring early. However, Lee does not believe the drastic drop will last as COVID-19 recedes.
Fundstrat
3. "4.2 million Americans reach 18 each year."
Lee stated, "All things being equal the US labor supply increases every year", pointing out an ageing population.
Fundstrat
4. "Total labor force expected to grow faster in 2025-2040 than it is today."
According to Lee, Gen Z's greatest impact on the labor market will be felt in 2025. It will last more than a decade.
"If the labor force is growing faster than expected, how can anyone think that labor inflation is structural and sticky?" Lee asked.
Fundstrat
5. "Legal immigration adds 1.1 million annually to the labor force."
Legal permanent residents, who could fill the gap and reduce wage inflation, would be a good option.
Although it may not be popular, increasing the legal permanent resident population will increase the supply of labor. Lee explained that this increases the workforce, which in turn reduces wage pressure.
Fundstrat
6. "Nearly 5 Million Americans have been directly affected by COVID."
Many people aren't working due to COVID or caring for someone with it, particularly during the delta variant surge.
"Covid-19 is creating labor shortages." Lee stated that if COVID-19 disappears, it is only a temporary shortage of labor.
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