The debt ceiling debate may be weighing on the stock market short term, but long term we have bigger issues to be concerned about. The ceiling will be raised, accompanied by endless political posturing. The country does have money and will not default. Yes, our debt is too high and our spending needs to be reeled in.

 

But what are the core economic issues America is really facing?

 

Washington has yet to appreciably reverse unemployment and fix the housing glut, both of which increase the possibility that we may re-enter an economic recession. These core unresolved issues are creating the overwhelming uncertainty that is keeping many investors on the sidelines and preventing businesses from expanding and hiring. As a result, way too many of our citizens have either lost their home or are living on the edge.

 

So until we have some substantive progress on the economic issues that drive business and affect people’s lives, the market will remain sensitive to news of the day. To me, this grasping at the promise of good news makes for unfavorable odds. It reminds me of a biotech stock with everything hinging on FDA approval of its single product.

 

On top of this uncertainty, we are now in the third year (post March ’09) of a stock market recovery, which is historically proven to be the choppiest of the three years. The list of leading stocks has narrowed since the last earnings cycle, and many stocks that just posted excellent earnings are having a hard time gaining traction. Plus, the institutional buying needed to fuel a meaningful rally going forward is just not there at this time.

 

Many theories about what’s going to happen—or not going to happen—in the economy and the stock market are really just predictions based on impatience. “Where is the market headed?” “I need to make money now!” “What stock should I own?” “My money should be working for me while I’m asleep.” We all want the market to get better. Yesterday. I understand that impatience. But even with the right leading stocks, the market environment determines your overall performance. The huge uncertainty caused by unresolved, core economic issues makes for a very poor risk-reward ratio, one that keeps me far more defensive than offensive.

 

Best Returns,

 

Scott O'Neil

President, MarketSmith Incorporated

 

Follow on Twitter: http://twitter.com/#!/WScottONeil