It’s a fundamental lesson in economics and a lesson that all consumers and investors should understand. Even if we are in the midst of a healthy recovery it will not be a straight line up. Rather an economic recovery always has plenty of rough spots in it where it may still feel like we are in a recession. Don’t be alarmed the first time the stock market has a pretty strong move to the downside or the first time some of the economic numbers don’t show a very optimistic picture of the economy. An economic recovery is typically full of times where consumers and analysts alike question whether the recovery is real or not.

The recession we have been in was a very deep recession that will take a long time to recover from. The stock market has certainly priced in the fact that a recovery is on its way, but it may not have factored in the economic bumps in the road that are sure to come. Since September and October are typically two of the worst months of the year for the stock market, an investor should probably tread carefully with the stock market at these levels. There will certainly be some pullbacks where you can find stocks at a better price.

It’s fine to be optimistic about the outlook of the economy for your country and the world as a whole, but it is definitely wise to be realistic about the recovery. When there has been such a powerful global recession where so many have lost their jobs and the strength of the consumer has been compromised so badly, you must realize that it will take time to heal those wounds. The recovery may well be taking place now, but don’t expect a straight line up for the economy or the stock market!

How will the U.S. economy recover? Every pundit in the stock market has own opinion on this. Some experts thought that economy will recover in V shape, meaning that sharp plunge will be followed by sharp recovery. So far, it seems to be the case. Some thought that we will go thru U shaped recovery. Some argued that U.S. economy will recover only in W shape (sharp plunge + some recovery + sharp plunge + sharp recovery).  Some thought it could be L shaped or Square-root shaped.

Just when you think that you heard all predictions from stock market gurus, someone comes out with the prediction of “Reverse square root” shaped recovery! Greg Ip, U.S. economics editor for the Economist, thinks the recovery will be the combination of a sharp fall down, a sharp rise part of the way back up, and a long struggle.

I don’t believe in the “reverse square root recovery” theory. Economy is already turning around. Only missing piece is the employment. I see hiring picks up everywhere. We are having difficulty filling in some positions. Number of quality resumes we get also fell down in the recent weeks. My friend in M&A firm tells me that merger activities picked up lot of momentum in the last six weeks. At this point, I will just ignore the “reverse  square root recovery” prediction.

There have been very few times in history where the strain of uncertainty has been so abundantly clear in both the stock market and consumer spending behaviors. The uncertainty comes from all different angles, and while you certainly can’t blame investors and consumers for being extra cautious, it is actually part of the vicious spiral downward.

What kind of uncertainty is out there right now for the average investor? There is great uncertainty as to the extent of the current recession, as well as fears of possible deflationary pressures on our economy. The fears that the credit markets have virtually dried up are far from over with as well.

What kind of uncertainty is there for the average consumer? Consumers are worried about job security, investments, retirement plans, as well as a multitude of other things. The truth is as the average American worries whether they can make it from paycheck to paycheck and whether they will have a pink slip on their desk on Monday morning, the economic pain will just continue to worsen. No person in their right mind would continue spending just as much as they had been despite huge changes in the overall economic picture, and more specifically, their own personal finances.

Everyone has always known that the stock market can’t stand uncertainty and a lack of confidence in the system, but consumers confidence in the system is even more important than big investors. Make no mistake about it, the consumer is the driver of our economy and the current uncertainty swirling around our economy will likely leave many questions unanswered for quite some time. The markets and consumers alike can generally handle some pretty bad news, but what they can’t handle is the complete unknown. Right now we are in the unknown, and the pain is getting worse every single day.

Related Link: Dow plunges on news recession began in Dec. 2007