15 October 2023

Three Strikes

By Adrian Colarusso, CFA, CFP®

October 15, 2023


This week’s newsletter was written by Adrian before the tragic terrorist attacks in Israel. The violence does not alter our investment strategy at this time but weighs heavy on our hearts. A prayer goes out for the safety and healing of my friends who live in Israel and all the innocent lives on both sides of the Gaza border.

Writers fought for “equity compensation” and won

This year’s WGA strike saw 11,500 writers go pens down and signs up for almost five months. A friend who picketed alongside his writer colleagues sent me this podcast explaining the outcome of the deal.

We talk about equity compensation here a lot. Many of our clients earn company stock as part of their pay. It makes sense that workers who contribute to the overall value of the company should participate in its ownership.

Since the advent of streaming, writers of our favorite shows have watched their art blossom into mass popularity but earned no streaming-based residuals. A key feature of the deal paves the way for writers to participate in the upside financial success of their work.

Labor and capital need each other

The WGA strike also reflects broader themes in the labor market. With unemployment near historic lows, workers in many industries are seizing the moment to capture a bigger slice of the economic pie.

Alongside writers and their actor friends, workers are striking in the automotive and healthcare industries, each with their own unique pain points but similar underlying catalysts. Many are burned out and struggling to keep up with inflation. Interestingly, the scarcity of workers is one of the causes of the inflationary pressures that have sent interest rates soaring over the past two years.

As investors, we’re usually more concerned about the capital side of the equation. But we all benefit when society is sustainably balanced between the needs of capital and labor.

In the chart below, you can see that labor’s share is ticking up decisively of late, with capital’s share declining commensurately.


You might interpret that to mean that it’s a bad time to invest in stocks if labor is in the process of gobbling up all the profits.

However, labor and capital have shared relatively consistent slices of the economic pie over the longer term. And stocks have fared fantastically well for those who held them consistently for long enough periods within this time frame (do I really need to show you a chart of the S&P 500 going back to 1933?)

“Quality stocks”

Matt referenced our penchant for quality stocks at the end of a recent newsletter. You might think, wouldn’t you always want to own “quality stocks”? Not necessarily.

This semantic designation has a technical definition. Quality companies are those with 1) high return on equity, 2) stable year-over-year earnings growth and 3) relatively low levels of debt.

In the zero-interest rate world from 2008 to 2021, the market rewarded riskier companies with higher – even if uncertain – growth potential. With interest rates so low, it didn’t matter how much debt they had on the balance sheet. And since investors had no alternative to generate returns with safer assets like bonds, they speculated in high growth-potential stocks with less regard for risk.

We believe quality stocks have more room in their cost structures to bear higher labor costs and higher interest rates. So far this year, the market has rewarded these companies meaningfully more than the broader benchmarks, a dynamic we expect may continue in a potentially higher-for-longer interest rate environment ahead.

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