Unions Are Back.
Will They Hurt Stocks?
Inflation is a thorn in the side of global markets, and the pain has persisted for far longer than most economists had anticipated.Are we seeing a paradigm shift in the g lobal economy? The answer depends on whether we see persistent upward pressure on wages.
Within the United States, we are seeing renewed interest in organized labor unions among the workforce. Our investment team took a deep dive into the relationship between inflation, corporate profits and increased union membership.
Inflation, Corporate Profits and the Ties to Unionization
This current bout of high inflation has provoked many comparisons to the 1970s. But we don’t think that’s the best analog for today’s economic conditions. As we wrote a couple of months ago (see full version here), in our opinion, the post-WWII 1940s looked more like the current U.S.:
“When [WWII] came to an end and citizens could finally travel and spend as they pleased, the U.S. saw the largest peacetime inflation boom as non-government spending rose roughly 40% in the year that followed. Government spending fell off a cliff—dropping from 55% of GDP to 16%. By 1946, prices of agricultural goods costs rose 12% in a single month and continued at a blazing pace of 30% by year-end (compare to today’s grocery price inflation). In that same year, corporate profits grew over 20% and wage growth took off as labor unions began to form and demand more wages… All of this occurred before the global supply chain had a chance to re-establish itself from a wartime shutdown.”
Sound familiar? In 2022, inflation is running hot, supply chains are broken, corporate profit margins are approaching levels not seen since the 1940s, and there has been a renewed surge in unionization across the country. Over the past 11 months, 200-plus Starbucks stores have unionized. Amazon, Apple, Chipotle and a slew of other companies are facing organized labor votes. Unions have material effects on the operational efficiency of firms and affect company bottom lines. After decades of declining union membership, why the sudden surge? And how have unions affected company performance in the past?
One potential cause of the surge? Rising corporate profits. Our research shows an interesting correlation between corporate profit margins and the union surges both in the late 1940s and today. As profit margins increase, so does support for unions, suggesting workers feel they’re not getting a fair share of the profit pie. In the chart below, you’ll notice U.S. corporate profit margins are approaching levels not seen since the late 1940s. And, to no one’s surprise, this is being accompanied by a union surge like the one in the 1940s. So, with the rise of unions impacting large corporations across all sectors of the marketplace, how do organized labor efforts affect a company’s stock price performance?
Effects of Unionization on Stock Prices
The National Bureau of Economic Research (NBER) conducted a fascinating 40-year (1961–1999) study covering labor union efforts and the resulting stock price performance. The entire report can be found here, but these are the key points:
Key Takeaways
The data is clear: Union votes have a negative impact on stock price but only in the short term. What this means for you as an investor depends on your investment strategy and approach. For the long-term investor focused on the power of compounding, dividend payments received and time in the market, the risk of union formation should have little impact on the decision to invest in a particular firm. For those with a tactical or active-trading strategy, being aware of the potential short-term impact of union formation is critical, as a pullback may offer portfolio managers better entry points.
It’s important to note, too, that corporations can act to reduce the threat of union formation by ensuring workers are offered robust wage increases, benefits and participation in company success. Corporate initiatives like this lower unionization risk.
Our investment team continuously monitors investments for these types of risks and company responses to them. Our actively managed portfolios avoid overexposure to union risk and search for strong entry points. Our long-term buy-and-hold investors can rest assured that union efforts have short-term effects. We believe our in-depth research and understanding of the companies will lead to the long-term success of our portfolio holdings.
