Why Rising Wages Scare the Heck Out of Investors

NEW YORK, NY - FEBRUARY 05:  Traders work on the floor of the New York Stock Exchange (NYSE) on February 5, 2018 in New York City. Following Fridays's over 600 point drop, the Dow Jones Industrial Average fell over 300 points after the Opening Bell.  (Photo by Spencer Platt/Getty Images)
Traders work on the floor of the New York Stock Exchange on Monday in New York City.
Spencer Platt/Getty Images

On Friday, the U.S. Department of Labor released a strong jobs report showing wages rising at their fastest rate since the Great Recession. Then, the stock market promptly began to plummet. The Dow Jones fell an amusingly on-the-nose 666 points—its worst day since the U.K.’s Brexit surprise. Global markets subsequently took a beating, and U.S. equities are still sliding as I write this today.

Why is good news for workers turning into bad news for shareholders? The answer is a useful illustration of why the stock market is often a poor guide to the overall health of the economy.

Right now, traders seem to be worried that if wages rise too fast, it will cause the Federal Reserve to hike interest rates in order to head off inflation down the road. When, earlier this year, the central bank suggested that it would raise rates, much of the market was skeptical, in part because inflation has been so subdued for so long. But faster pay gains for workers make it more likely the Fed will follow through, both because rising wages are a sign that the whole economy is heating up and because employers will eventually have to raise prices to keep up with the cost of labor.

If the Fed does hike quickly, it will slow down the pace of growth a bit and could put a damper on corporate profits. But that’s probably not the main reason Wall Streeters are in a tizzy. The thing you have to keep in mind is that stock prices have been propped up for years now by low interest rates around the world. Investors haven’t been able to make much money on safe assets like American and European government bonds. So instead, they’ve piled money into riskier bets like sovereign debt from developing nations and stocks.

As interest rates go up, and money managers can suddenly make a better return on vanilla investments like treasuries, we should expect stocks to deflate a bit. That prospect seems to be driving the past couple days of trading—not investor disdain for the working class.

This is all a reminder that Donald Trump’s incessant bragging about the bull market has been absurd from the start. The Dow Jones and S&P 500 are not barometers for the well-being of the whole economy. (Heck, the Dow isn’t even a good barometer of the stock market.) Sometimes prices go up because the economy is doing well. Sometimes they go down because of it. And as of this month, the economy seems just a bit too strong for shareholders’ tastes.