This morning, I was reading an economic newsletter.  The gist of the argument in the main article is the way out of our economic issues here in the U.S. is through economic growth.  Yes, I agree, there is a circular and rather obvious aspect to this statement.  Nevertheless, it is true.  Economic growth is the way to solve most all of our economic issues, even the U.S. debt problem.  The issue at hand is how best to grow the economy.  Although I disagreed with the approach to growing the economy described in the article, I do agree with the opening paragraph, as it summarizes my argument against those who keep saying that the U.S. is doomed.

To say that America in 2011 faces tougher challenges than the country has faced before is not true.  Our problems are not new or harder.  Perhaps the political will is weaker; perhaps we are suffering a perfect storm of monetary malpractice and bipartisan incompetence.  But our problems are surmountable.

Yes, they are surmountable, and the writer of the article points out, decade by decade, all of the economic challenges the U.S. has surmounted since 1946 to prove it.  I had forgotten some of them, such as the one below.   

The 1970s economy began with a mild recession and then suffered a huge one in 1973 and 1974, when stocks fell 48% and unemployment hit 11% amidst OPEC oil embargoes and scandal driven resignations of the American vice president and president.

The doom and gloom of those years still rings in the halls of history.  My point is that so much of what happens in both the economy and the market is about perception.  What we are seeing in the market these days is the perception that the second half of this year might be less robust economically (cyclically) and that the coming budget cuts might affect that cyclical phase negatively.  The recent economic indicators seem to suggest this, especially the housing numbers and some of the “not so high end” retailers lowering their guidance for the rest of the year.  Manufacturing softness also suggests a sluggish finish to the year. 

The “bright” spots, however, are the continuing downward trend in the unemployment numbers, another round of overall decent earnings reports, and the continuing drop in commodity prices, especially oil.  The mix of mildly good and the mildly bad breeds mild uncertainty, and, thus, the mild volatility of the market over the past week or so.  Assuming no geo-political catastrophes in the near future, I suspect this rather mild market will continue right into summer, but then …

The economy will probably chug along as expected this summer.  The wild card is the debt resolution discussions that will come to a head sometime in late July, I suspect.  If the market perceives those discussions are not going well, the tune of doom and gloom will resume.  If, however, the perception is the U.S. has a viable plan to move forward on resolving its debt, then the tune could easily change to something along the lines of “Don’t Worry, Be Happy.”

Trade in the day – Invest in your life …

Trader Ed