Market analysts say investors should focus on big picture

The stock market’s stomach-churning drop Friday and Monday was rooted in some topsy-turvy reasoning: What’s good for the economy is bad for stocks.

That belief became all too palpable when a strong January jobs report highlighted a substantial increase in annual wage growth to 2.9% from 2.5%. It stirred fears that bigger pay increases will trigger higher inflation, leading the Federal Reserve, and bond markets, to lift interest rates more rapidly than anticipated. Higher rates, in turn, will make bonds and other fixed-income assets relatively more attractive compared with stocks, which are riskier, spelling the end of the 9-year-old bull market.

Or so the thinking went.

But wait. Americans have sought bigger pay hikes since the Great Recession ended in 2009. And the favorable economy those fatter raises reflect should be good for corporate earnings and stocks, no? The answer lies in the gap between short-term investor reactions and longer-term economic fundamentals.

In fact, the big market rebound Tuesday was at least partly borne of investors’ realization that there’s no reason to flock to the exits when the economy is this sound.

“This ‘good news is bad news’ phenomenon is a great example of why individual investors need to block out the daily noise of markets, think long term and focus on the big picture,” says Greg McBride, chief financial analyst of Bankrate.com.

The fear that an improving economy will spur higher interest rates and lower stock prices has been a staple of the recovery, Ware says.

The recent jump in wage growth, however, raised the specter of faster inflation that could force the Fed to boost rates more sharply.

But analysts say the market is being far too jittery. Several times over the past couple of years, annual wage growth has approached 3% only to retreat to its prior 2.5% pace. “We’re not convinced you’re going to see continued 2.9%” pay increases, says John Lynch, chief investment strategist of LPL Financial.