Short-term interest rates remain near zero, and the Federal Reserve on Tuesday pledged to keep these rates low until at least 2013. Despite these low rates, there is a growing horde of cash on the sidelines. “Core” inflation is at a tolerable 3%. The federal debt ceiling has been raised, but many budget problems have just been kicked down the road. Republicans have taken a firm stand against increased government spending and pledged not to raise taxes. With future government economic stimulus now questionable, financial markets are predicting a new recession.

Yet federal spending in 2011 is still rising and, according to the Office of Management and Budget and the Congressional Budget Office, federal spending will rise each and every year over the next 10 years. As a share of GDP, however, federal governement spending is projected to fall by about 2% of GDP over the next 10 years. Not a tremendous drop, but a step in the right direction for fiscal conservatives.

Corporate earnings are rising rapidly. According to Bob Carey, Chief Investment Officer of First Trust, S&P 500 earnings are up 20% over last year and the S&P 500 P-E ratio (on forward earnings) is around 12. The market is cheap on a historical basis, very cheap relative to current low interest rates.

Recent data show that the economy is not tanking. Initial jobless claims are at 400,000 (down from 478,000 at the end of April). Car and truck sales were up 6.9% in July (over June) and chain-store retail sales were up 4.6% in July from last year. The ADP employment report showed 114,000 new private sector jobs in July, which was the 18th consecutive monthly gain. In other words, there is no evidence of a recession at this point in time.

European debt problems continue to cast a shadow on the financial markets. The “PIGS” (Portugal, Italy, Greece, and Spain) have spent themselves into a corner, but correcting this mistake may have little effect on the global economy. Many banks will take losses, but those losses should be contained. Germany seems strong enough economically to carry all of Europe on its shoulders. Therefore it seems unlikely that Europe alone will drag the U.S. into a recession.

In the end, the sell-off looks like a technical correction, not a fundamental change in the long-term trend. With the major stock indexes now down around 15% from their recent highs, this is the biggest selloff since the market bottom of March, 2009. The stock market could reverse course and turn up at any time, but volatility is likely to continue. Corrections run their course and then end. I wish I could trade each and every move in the markets and make all of my clients rich in short order, but this is an impossible dream. No one can do that. Thirty-plus years in this business have taught me that patience and time are an investor’s best friends. If you have a longer term time horizon I encourage you to stay the course. The stock market is undervalued right now and inevitably it will go back up again. If you can tolerate some volatility and are under-invested in stocks, now is a great time to be shopping for bargains. If you are uncomfortable with your current exposure to stocks, however, there will be rallies that give you the opportunity to lighten up. If you would like to talk, or if your financial needs and goals have changed in any way, please call.