The Stock Market is Making Me Nauseous

Last summer I posted an entry in the AT blog entitled The Stock Market is Making Me Dizzy. In that piece I bemoaned the - what seemed at the time - wild gyrations in the stock market.  I pointed out that as a newly retired person, it was very difficult to know how to position and manage my 401(k) funds if I had no idea what the short-term -- much less long-term -- trend of the stock market was going to be.  I worried that the current moment resembled 1934 in that Bush-Obama was startling similar to Hoover-FDR and I wondered whether the upcoming fall election would channel that of 1934 or 1994. Fortunately it was the latter. Of course we are all wondering whether the election of 2012 will mirror those of 1936 and 1996 or of 1980, but that history is still 15 months from being written.

At the moment, the market is even wilder than it was last summer.  The daily gyrations are worse both in frequency and amplitude.  The prognosticators are all over the map with their explanations of why, not to mention what comes next.  And the recommendations for coping range from apocalyptic to incoherent; convert everything to precious metals (ignoring the risk that the astronomical price of gold might be at its apex); or convert everything to cash (upon which the effective rate of return is miniscule, and actually, essentially negative due to the fact that our official "low" inflation index is bogus); buy T-bills (backed by the full faith and credit of our newly downgraded government); move equities to bonds; or stay put.  I don't have Warren Buffet's resources, nor any insider information. Trying to decide what to do is enough to make one nauseous.

Why might this summer's stock market turmoil be worse than last summer's? Three reasons occur to me:

1. Europe and the global economy. There have been days on which "analysts" attribute the wild swings on Wall Street purely to economic (or political) events in Europe or the Far or Middle East. Given how intertwined global finance has become, I have no doubt that there is some -- perhaps substantial -- truth to these assertions. It seems to me that these trends will only strengthen and, therefore, since the world is not getting any more stable, investors had better get used to stock market volatility as the new normal.
2. The US financial situation. Things really haven't gotten better since last summer. Well, it is true that the liquidity/banking/housing/auto manufacturing crisis of 2008-09 has ameliorated to some extent.  But it is also true that our deficit/debt/unemployment/stagnant growth crisis continues unabated. Moreover, a much greater percentage of the population has become aware of the perilous and deteriorating economic health of our country.  More people now understated that the federal (and also State) government(s) have grown into monsters that are eating our wealth, corrupting our business and diminishing our future prospects.  The worry is palpable and it certainly affects Wall Street performance.
3. It has been conventional wisdom that political gridlock in the form of mixed control of the various branches of the federal government is good for the country.  One can cite many supporting examples: for example, the good times during the eras of Eisenhower, Reagan and Clinton.  Conversely, when one party has been in complete control, things have not gone so well - for example, under Johnson, Carter and during the first two years of the Obama administration. Well, we have mixed control now; why aren't things improving?  One possible reason is the hardening of the nation's political arteries.  The hard Left now virtually controls the Democratic Party and the Republican Party is coming under increasing control of the hard Right. These two communities hold sharply different visions for the future of America.  The possibilities of a meeting of the minds in the middle are increasingly remote.  Political polarization intensifies.  One result: greater instability on Wall Street.

So will we be OK? Optimists say: the US still has the most dynamic economy on earth; Americans remain among the most hard-working and resilient people on the planet; the country is rich in natural and (now we know) energy resources; its competition around the globe, while growing stronger, is still very weak compared to us; our economy -- mired as it is in government debt and regulation--is still in better shape than that of our competitors; profits are good, corporations are sitting on a pile of cash and labor unrest is almost unheard of. We'll tame unemployment and stagnant growth -- it just might take longer than after past recessions.

Pessimists counter: the deficit/debt problem is unprecedented, perhaps insoluble and no one in Washington is addressing it seriously; some metrics indicate that we are a poorer county than we were in the previous generation (which never happened in our history) and the markers point toward continued decline; the government has metastasized beyond the point that its growth can be tamed by other than revolutionary means; 50% of the people pay no income tax, reflecting the fact that we are not a country of rich and poor but a country of givers and takers; industrial innovation increasingly comes from overseas; our military is stretched thin and by any objective measure grows weaker and weaker, and we do not have the funds to restore it.

So which is it? I don't know. That's why I am nauseous.