Walmart Wage Hike: Bullish Sign for Consumer Stocks

Investing Daily Article of the Week

by Bob Frick

Finally buckling under pressure from protesters and workers for higher wages, Walmart, the country’s biggest private employer, announced Thursday it will hike pay for U.S. workers. At least, that’s what some activists and some media outlets would have you believe.

But I agree with the analysts and economists who said Walmart is changing its wage scale because it’s smart business to do so. And it’s a decision investors should see as another important bullish sign in our slow-motion recovery.

The news: Walmart said that it will increase pay to at least $9 an hour by April, and that will improve the lot of half-a-million full-time and part-time workers at Walmarts and Sam’s Clubs. That Walmart pay hike raises its minimum wage to about 24% above the federal minimum wage, and the Walmart minimum wage will rise to $10 an hour next year.

About 1% of the entire U.S. workforce is employed by Walmart, or about 1.4 million people. To further put the importance of Walmart in perspective, consider the other big economic story of the week: The Greece bailout. Admittedly this isn’t an apples-to-apples comparison, but Greece’s GDP is about $242 billion, or about half Walmart’s sales last year.

The market wasn’t too happy about the news, and on a day when the indexes were basically flat, Walmart stock was down more than 3%. But given that Walmart CEO Doug McMillon said months ago that the company would raise its minimum above the federal minimum, it shouldn’t have come as a surprise.

And the media, if it wasn’t saying this was an outright victory for activists, muddled the “Walmart has bowed to pressure,” with the “Walmart had to stay competitive” storylines. Or to quote the NBC Nightly News:

“The move comes after years of protest by workers … and now Walmart faces a more competitive labor market.”

Thankfully for the U.S. economy, and for investors, wages are slowing starting to rise. As I pointed out in a recent Mind over Markets, about 70% of our GDP is based on consumer spending, and given the U.S. economy is a keystone of the world economy, American consumers having more money to spend is crucial for our bull market continuing and major chunks of the world economy recovering.

Also thankfully, we’re already spending more. Last year saw consumer spending increase modestly over 2013-3.9% versus 3.6%-despite ending on a down note, dropping 0.3% in December. And the Consumer Confidence Index hit triple digits last month-just topping 100-for the first time since 2007.

Gap and IKEA raising their minimum wages was news last year. And last month Aetna said its minimum wage would rise by about $4 an hour to $16, and that it’s making the move to cut turnover and attract better talent. But given its sheer number of low-wage workers, Walmart doing so could start a domino effect. Or, a Domino’s effect – we could see pay rising at pizza joints and, hold your breath, at McDonalds, where McWages hover near $8-an-hour for its lowest paid workers.

The news from Walmart means lower unemployment is finally spurring higher wages, and rising wages often are the last piece to the start of a strong recovery. You recall strong recoveries: High levels of GDP growth, low unemployment and healthy levels of inflation. We have to go back 10 years to feel such an economic rush.

Even if we don’t get our economic engine really revving, when you add up lower energy costs, high wages and more jobs, this year is shaping up to be the strongest year for consumer spending since the Great Recession.

Investors who have bet on U.S. retailers have done well in recent years. The SPDR S&P Retail ETF (XRT) was up almost 10% last year, more than 42% in 2013 and has a five-year, average annualized return of about 23%. Given the outlook for consumer spending, this ETF is still a good bet.

As far as individual stocks go, my colleague Jim Pearce, who manages the Personal Finance Growth Track portfolio based on his IDEAL system, likes a couple in the official consumer staples sector (though they seem as though they should appear in the consumer discretionary sector) .

One is Mondelez International, which sells snacks from Triscuits to Oreos. The other is Diageo PLC, the U.K.-based, multinational liquor company that sell brands from Johnny Walker to Guinness. Oreos and Guinness-now those are staples.

But if the Walmart wage hike is a key sign of a broader recovery, expect ripples beyond the consumer staples and consumer discretionary sectors.