A New Twist? Markets Driving Politics?

Traditionally, investors have seen Congress act and the markets react. But watching market action over this summer one has to wonder if now we have markets acting in an attempt to get Congress to react? Is this why we've seen such a sharp selloff in equities around the world in a flight away from risk assets? Is this a 2008 style meltdown all over again?

To be sure, we have plenty of challenges in the US economy:

1. GDP growth reduced to near 0%
2. negative real consumer spending the past two quarters
3. the economy flirting with a double dip recession
4. an S&P downgrade of the U.S. credit rating
5. weak national housing market
6. weak consumer balance sheets (too much debt)
7. weak construction demand (a key driver in most recoveries)
8. unemployment above 9%.

And that's just the US! Add Europe's woes to the picture, which many contend are far worse, and, well, you get the picture! The result has been panic type moves based on investor fear that unfolds as they witness political leadership which looks dysfunctional.

But there are four good reasons to not panic and sell, and perhaps some great reasons to consider increasing equity exposure in portfolios:

1. Valuations. US corporations are putting up great earnings numbers and have exceptionally strong balance sheets even relative to better economic times. There are many ways to value markets, P/E ratios etc. Do your homework and decide if you think US stocks represent a great buying opportunity.
2. Emerging markets. Rapidly growing emerging economies are also a big part of the US corporate profit picture. We're players globally, not just at home.
3. Deleveraging. The process that began in 2008 continues and household balance sheets are in fact improving. Yes, more progress is needed but progress has occurred!
4. Housing. Working off excess housing inventory remains a challenge, but affordability of housing is at an all time high. New permits are running at half the household formation numbers indicating absorption of housing at a decent clip. If we can just get the jobs engine going, a real improvement could be just ahead.

I'll add one final observation drawn from years of personal experience observing and trading markets. Check your own pulse. If you're anxious and nervous, others likely are too. It can pay handsomely to do the exact opposite of what you FEEL like doing. As John Templeton once said, the best time to buy is when there's blood in the streets.

Perhaps this time it IS different. Perhaps we have capital markets pushing politicians to craft real solutions and to do what's needed to get the US economy back on track and headed in the right direction!