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Depressed by a down week for stocks? Don’t sweat it

Hey, you there on the ledge. I know you're a bit down about a bad week for stocks. But before you do anything silly, let's chat a bit.

Sure, the past couple of days have been rough, but as my colleagues and I at the Institute for Treatment of Stock and Markets Affective Disorders (ITSMAD) like to say, a little fall for the right reasons never hurt anyone.

Okay, bad metaphor given your current situation. What I'm trying to emphasize, though, is that markets go up and down for the darndest reasons – and right now, the biggest reason for market gloom is the good news breaking out elsewhere in the economy.

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Take the big selloff on Thursday. It was motivated by a surprise jump in the Employment Cost Index in the United States. The increase, which was the biggest since 2008, sparked fears that wages and benefits were actually bursting out of their slow-growth rut – which Wall Street doesn't like to see, given that it could lead to an outburst of inflation, which policy makers might then address with higher interest rates and higher bond yields, meaning more competition for stocks.

How does that make you feel? Not to judge, but a lot of investors appear to be just a bit too fond of the situation of the past few years – the one where capital's share of the economy keeps growing and labour's share just goes on declining. Talk about a co-dependent relationship!

If you take the long view, it's encouraging to see signs that the outlook for wages and employment is improving. Unemployment claims in the U.S. are falling rapidly and Friday's jobs report showed that the U.S. economy is creating jobs at a decent clip. This is good, since the only way to create demand for more goods and services is to give average Americans a bit more spending money.

I feel your pain, of course. Ever since the financial crisis, most investors – and you are a good investor, keep telling yourself that! – have been living in a bit of a dream. Interest rates have plunged to generational lows, letting companies refinance their debt at absurdly low costs. Meanwhile, wage pressures have all but disappeared, given the amount of slack in the economy. Profits have roared as a result.

The problem now is one of addiction. How do you wean the market off super-low rates? Especially with the Federal Reserve tapering its quantitative easing program, it's a sensitive issue, not just in the U.S., but in Canada as well.

But I'm not seeing a lot of reason for fear. The economy in both countries is growing and the Institute for Supply Management's index of U.S. manufacturing activity rose to its highest level in three years on Friday. Auto sales are strong, indicating that consumers are beginning to feel a bit more chipper. Most important, of course, is the improving U.S. jobs picture.

One thing we've worked on a lot in therapy class is being realistic and I have to tell you that one day the market is going to swoon. But Deutsche Bank, in a report Friday, told us not to expect a big dip any time soon.

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Its reasoning is that corrections of 10 per cent or more don't tend to happen in the middle of a market cycle, which is where it figures we are now. More likely is a 5 per cent dip followed by more gains ahead.

So come in off that ledge, will you? Given the state of world politics, there are lots of good reasons to be downcast right now, but the stock market isn't one of them.

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About the Author

Ian McGugan is a reporter with The Globe and Mail's Report on Business and has been writing about investing, economics and business for more than 20 years. He joined the Globe and Mail in 2010. He has been executive editor of Canadian Business magazine and founding editor of MoneySense magazine. More


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