The Perils of Pessimism: Are Investors Ignoring the Good News?

It's easy to be pessimistic these days, with financial markets tumbling amid news of tragedy and instability. But there are good reasons for investor optimism too.The financial markets have been in a sour mood lately. Major U.S. indexes tumbled this week, giving back all of the year's gains, and investor confidence has plunged.

It's easy enough to understand the pessimism. After all, the markets are famous for being frenetic, and the spate of tragedies unfolding across the globe certainly hasn't helped.

Early optimism about democratic reforms in Middle Eastern countries, à la Egypt, has instead morphed into a bloody civil war in Libya. Oil prices have surged as a result of growing instability in the region. And if that weren't enough, a brutal earthquake led to a tsunami that killed thousands in Japan -- and raised fears of a major nuclear catastrophe.

But investors would be wise to stave off the gloom with a more levelheaded approach. While the improbable sequence of tragedies is dominating the headlines today, a booming world economy -- one that is sparking a manufacturing renaissance in the U.S. -- may end up being the bigger story for the markets over the intermediate term.

More Evidence of a Strong Recovery

A roaring result for the closely watched Philadelphia Fed index Thursday provided the latest evidence that a strong recovery is under way. A key gauge of the health of the manufacturing sector, the index posted its fastest expansion since 1984. That's after it came in far ahead of economist's expectations the month before, as well.

"Starved of industrial activity in the depths of recession, manufacturing is feeding the recovering U.S. economic beast," analysts at TD Economics write in a research note.

The rapid growth of the middle classes around the world, along with the resurgence of U.S. consumer spending, is fueling demand for goods like cars and auto parts.

These sectors suffered a particularly brutal downturn during the depths of the recessions, as shell-shocked consumers pulled back and a credit crunch made financing even harder.

"But as the ranks of consumers in the market for new vehicles swells, and with banks more willing to finance their purchases, it is no surprise that the auto industry is roaring back to life," TD Economics analysts write.

Why Disaster Isn't Imminent

For the pessimistic pundits who get more airtime when markets fall, the strong economic growth is merely the prelude to another disaster. And runaway inflation -- which has long been predicted, but with little basis in reality -- is usually named as a top contender.

As the consumer-price-index data released Thursday shows, core inflation remains tame. True, food and fuel prices have risen sharply. But those hikes aren't due to a big trend; instead, crop shortages -- caused by a severe winter -- and the turmoil in the Middle East are driving those prices up.

With plenty of idle capacity waiting to come online, the U.S. economy has considerable room to grow before inflation becomes a widespread concern.

Industrial production remains 5% off its peak prior to the recession, and a lower-than-average amount of capacity is currently in use, according to TD Economics. "Until these ceilings are breached, inflationary pressures should remain muted," they write.

Amid the horrid, moving footage coming in from all over the world, it's no surprise that markets and investor sentiment have tumbled lately. Still, investors would be far better served by paying closer attention to the cold, hard facts that paint a far brighter picture instead.

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Dereck

Major Fraud Alert


The entire Federal Banking System under FirstGov has been "Consumed" and "Levied" by way of a Maryland State Circuit/District Court Ruled “Appropriation and Garnishment” of all Future Earnings prior to and after 2004 against Bank Of America by way of the F.D.I.C. Regulations Prohibiting failing Banks from Merging with other failing Banks between the Dates of 08/04/08 and 10/09/09.

Bank of America violated the 21st Century Act: Final Amendments to Regulation CC Section: http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20040726/attachment.pdf

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Businesses owned by the States (Public Corporations) are being sold Stock Shares by Corporations also under the Federal Banking System in this Worldwide "Ponzi Scheme". The World Fortune Company Merrick Inc. Sweden is dissolving Millions and Billions of Dollars from "All Levels of Government"in the U.S. of Financing based upon Years of "negligent inaction" involving this case.

The Federal Government has already been forced to discontinue supplying the Financing States use to pay their debts, Persons in Government Offices may want to begin to take their jobs more seriously, these are different times from 10 Years ago and you will not be accepted civil servants here just because you say you are here to do the right thing.

May 29 2011 at 12:34 AM Report abuse rate up rate down Reply
ultraz2

This is the last year for a up market until after the 2012 scare is over. 2013 will begin a REAL bull. Wether it will be another Bull Sh-t market or a real Bull market remains to be seen.

March 23 2011 at 8:03 AM Report abuse rate up rate down Reply
donut999

food money, not good money, but i guess all money is good.

March 21 2011 at 8:09 AM Report abuse rate up rate down Reply
donut999

there isn't any real or meaningful good news for the average joe. corporate earnings are up. hooray, if only we could buy groceries, put gas in the cars, or pay a few bills with corporate earnings. average joe is not running down to the mail box for his dividend check. if he owns stock, it is primarily through an ira or a 40X plan and most will not touch these funds. the folks getting the big dividend checks already had gas and good money before the mailman showed up

March 21 2011 at 8:08 AM Report abuse +1 rate up rate down Reply
inasctg56

reply to david: Past 40 years of deficit spending? No, George W. Bush started with a clean slate after Clinton and took the debt to almost $11 trillion before leaving when everything was collapsing due to failed policies and legislation.

March 20 2011 at 10:59 AM Report abuse +2 rate up rate down Reply
inasctg56

Just reported by Daily Finance: "A key gauge of the health of the manufacturing sector, the index posted its fastest expansion since 1984." All thanks to an administration who is workng with our manufacturing sector and trading partners negotiating better trade deals as the $45 billion new agreement with China. Also South Korea and now South America. For every 10% gain in exports, we gain 7% job growth. We have had 19 months of manufacturing gains and exports have had double digit gains. The dems policies work for american workers. The gop's works for corporations to make record proftis overseas. End of story.

March 20 2011 at 10:57 AM Report abuse +2 rate up rate down Reply
David

There are many ways to begin to cut away at the deficit. It's a ball and chain that is preventing a huge, sustained rally. It's also a security risk. Let's see, how much was the most recent budget over incoming tax revenue? When the budget expenditures come in lower than REVENUE (not GDP) we'll know they are finally beginning to pay for the past forty years of deficit spending. Only then.

March 19 2011 at 1:14 PM Report abuse +1 rate up rate down Reply
beneped

Rather sad to see the Americans now topping the list of the most fearful/frightened people in the world...thank you Dubya, Karl, and let's not forget VP and Rumsy!

March 19 2011 at 12:25 PM Report abuse +3 rate up rate down Reply
inasctg56

Now I know all you gop followers don't want to admit it, but the fact remains: "A key gauge of the health of the manufacturing sector, the index posted its fastest expansion since 1984. That's after it came in far ahead of economist's expectations the month before, as well." This is what is driving the market and lowering unemployment. As those manufacturing checks come back into communities it creates demand for consumer goods and services, returns our tax base, and the natl debt will be addressed more aggressively. All thanks to an administration who is working with our manufacturing sector and trade partners on behelf of american workers instead of corporate overseas record profits - as the Bush administration did.

March 19 2011 at 12:16 PM Report abuse +2 rate up rate down Reply
1 reply to inasctg56's comment
bggdg

You mean just when public sector employment is being reigned in, private sector employment begins to explode? Gee, whoda thunk?

March 20 2011 at 2:02 PM Report abuse -1 rate up rate down Reply
scottee

what good news???? the trillion dollar national debt???? the fed printing and diluting our dollar???? what good news????

March 18 2011 at 8:13 PM Report abuse rate up rate down Reply