Monday’s 1,100-point Wall Street plunge shows stockmarket investors are out of touch with reality.
That is the claim of one leading commentator, who says investors “are trapped in a 1970s alternate universe”.
Stocks went into free fall on Monday, with the Dow plunging 1,600 points at one stage before recovering to 24,342, a 4.6% decline on the day of 1,178 points.
It was the worst day on Wall Street since August 2011, and send shockwaves around the world, with global stockmarkets taking a hit.
Yet across the US, all the signs are positive. Unemployment is at its lowest level in 17 years.
The economy is growing. The nation’s total economic output, GDP, grew by 2.6% in the last quarter of 2017, down on the previous quarter’s 3.2%, but still a healthy lick.
Globally, too, the signs are good, with the International Monetary Fund revising growth figures upwards to 3.9% both this year and in 2019.
So why the big sell-off? Rex Nutting, MarketWatch's international commentary editor, says investors were “freaked out” by figures showing a steady rise in workers’ pay, which increased 2.9% over the past year.
The fears were that strong wage growth would prompt the US Federal Reserve to start hiking interest rates sooner than expected, to prevent inflation – effectively putting a brake on growth.
The theory goes that workers would be able command higher wages, and companies would be forced to raise their prices, since the cost of labour is the main cost of doing business.
However, Nutting says 2.9% is no big deal, with previous growth spurts coming in at 4%, and wages barely growing faster than inflation.
“My question to investors and policymakers on this point would be: have you been in the real world lately?” he wrote.
Labour costs absorbed
“Do workers have any bargaining power over companies to set wages? Do companies actually raise their prices in response to paying higher wages?
“It may have been plausible in the 1970s, when many workers’ pay was protected by automatic cost-of-living increases and when companies could easily raise prices, but the theory of wage-push inflation cannot be taken seriously in today’s world.”
Nutting says higher labour costs are often largely absorbed by companies in a competitive marketplace, with unit labour costs rising just 0.2% in 2017.
“Higher wages are exactly what the economy needs to keep the expansion going,” he added.