Don't Panic: The Economy Is Still Signaling A Slow Recovery

Market panics produce opportunities for investors who keep their cool. The U.S. economy is improving on many fronts, and that’s a strong indication that investor fears, rather than any fundamental economic weakness, are to blame for the recent stock market volatility.

It’s understandable to feel anxious about this latest turbulence, but try to see it as a chance to rebalance your portfolio. The stock market’s freefall offers a chance to shift assets into sectors whose prices have fallen significantly, and away from industries that may lag overall growth trends.

Investors have overreacted to a trio of troublesome events that hit at the same time: Standard & Poor’s downgrade of the United States’ credit rating; some weakening economic data; and the U.S. fiscal position. Market sentiment also turned down on news of a $10 billion lawsuit against Bank of America and persistent worries over the European debt crisis.

The ratings downgrade apparently took a psychic toll, but many analysts believe it doesn’t signal a basic problem with the U.S. economy. “While the downgrade is a blow to our national ego, there is no real change in fundamentals,” says economist Fritz Meyer.

Here are some considerations to help you keep the market panic in perspective and maintain a healthy, long-term outlook on the U.S. economy and your investment prospects.

-Following debt downgrades in Australia and Canada, stocks ultimately surged after an initial period of concern and uncertainty. 
-The current market crisis is not like the 2008 crash. That was a bottom-up financial and liquidity crisis, and this is a top-down political crisis at a time of substantial market liquidity. 
-Despite some negative economic data during recent weeks—second-quarter growth in U.S. gross domestic product, manufacturing numbers in July, and personal spending in June—other indicators suggest a brightening outlook. Payrolls, auto sales, the money supply, retail sales, and housing starts all are showing solid signs of improvement. 
-Mortgage rates are at record lows, housing affordability is at a record high, and oil prices are falling, all of which should benefit U.S. households’ bottom line. 
-Corporate revenues soared 13.2% in the second quarter, fueled largely by gains overseas. 
-Economic growth is continuing in most parts of the developing world, including China, Asia, Latin America, and the Middle East. There is every reason to believe that growth will persist and continue to add to corporate profits. 
-The European Central Bank and European Union are taking action to solve the region’s debt problems. 
-The Index of Leading Economic Indicators turned upward at the end of June and points to slowly expanding economic activity. 
-Payroll data reflected modest improvement in July and is displaying a typical pattern of jobs recovery that occurs after a serious slump. 
-Vehicle sales rose slightly in July as the parts shortage caused by the Japan earthquake began to subside. Sales should rise more rapidly as pent-up demand kicks in. 
-U.S. GDP is expected to grow, according to a recent survey of economists, who expect a gradual return to the 3% range. 
-Consumers have paid off much of their lingering debt, and consumer credit is surging—a key trend for this nation’s consumer-driven economy. 
-After its recent plunge, the S&P 500 was trading at 11 times 2011 earnings estimates and providing a 2.2% dividend yield in comparison with a 2.3% yield on 10-year Treasury bonds. “Valuation models I consult all suggest extraordinary value in stocks for long-term investors,” Meyer says.