Earlier this week, Federal Reserve Chairman Ben Bernanke told members of Congress that the economic outlook remains unusually uncertain. Stock traders generally don’t like uncertainty, so the initial reaction was predictably poor. But today (Thursday) the markets seem poised to recoup Wednesday’s losses.

That is pretty much the way the market has acted for the past three months. Short-term moves in either direction are quickly reversed. Economic announcements are met with volatility, but even the brightest economists like Bernanke don’t seem to have any real idea of what to expect in the future.

The second half of 2009 produced a powerful market rally and many people assumed that the stock market and the economy would quickly erase any evidence of a recession. That has not occurred.

As the chart below shows, even after the strong market advance in 2009, stocks making up the New York Stock Exchange Composite are still significantly below their 2008 peak. I added the red line to the chart to show that for the past year, stocks have stayed within a few percentage points of their current level.

As long as the uncertainty described by Bernanke continues, there is a good chance that stocks will continue to vacillate back and forth near the current level. For that reason, the best course of action for most investors is to maintain a conservative approach until the economic outlook clears.
F.S.