By Roger Conrad on July 30, 2010

Market volatility has income investors are worried about their holdings as rarely beforeat least thats the message I get from a look at my e-mail. Major crackups have been thankfully rare in market history, primarily because the memory of them dies hard. And the more recent the debacle, the greater is the worry of a repeat. Its been nearly two years since the start of the crash of 2008-09, and lingering fear still dictates investor behavior.

The Dow Jones Utility Average (DJUA), for example, started July in a severe tailspin that put many on edge and no doubt whipsawed more than a few investors out of good positions at lousy prices. That was followed by a steep upturn that took the DJUA from the 350 range to nearly 400, which, in turn, has yielded to a sharp drop back to the 380 area in the past couple days.

The upshot is that July was one of the best months in a long while for the average power company. But despite strong earnings for many utilities, investors are still as likely to sell the upticks as buy the downticks. Clearly, theres little conviction, and until there is prices are going to move around a lot.

The strategy Ive advocated for several months is to buy the downs and hold off new purchases when value-based buy targets are exceeded. Thats been generally successful as far as getting good prices. And its that what I continue to advise doing.

The major counter argument to it is that, should we see a reprise of 2008, everything will drop even further. In fact, Ive talked to several readers who are so convinced the market is headed for a second down-leg that theyre resolved to stay out of stocks entirely, with the aim of getting back in when prices revisit the early 2009 lows or possibly even lower points.

Investors have to be comfortable with the level of risk they take in order to keep emotion out of their decisions. In my view, however, the vast majority of worries investors are citing now have far deeper roots in emotion than rationality.

As a result, theyre accepting whats rationally unacceptable: yields of 0.5 percent and less when proven investments are yielding 10 times that much and more. Market history shows that most of the big gains take place in relatively short periods of time. If youre out of the market for too long, youre going to miss them and doom yourself to mediocre returns. Thats exactly what happened to too many investors in 2009. Barring something truly unprecedented, its going to happen to the overly fearful again this year.

Lets start with the idea that the global economy is headed back into the tank. We heard this argument a lot in the early summer as the European sovereign debt crisis percolated. Data were seeing now, however, show a Europe thats far from boom times but is nonetheless perking up.

This week, for example, Germany reported July unemployment dropped to 7.6 percent, putting the country on the brink of recovering all the jobs lost to the recession. Even the troubles with sovereign debtnever anything close to the threat posed by collateralized mortgage obligations two years agohave subsided, as credit measures like the TED spread have reverted to normal levels.

In the US the buzz is that growth has decelerated, with gross domestic product growth slowing to just 2.4 percent in the second quarter. Some worry unemployment remains too high to support a recovery in consumer spending, others that less government stimulus will show up in less output.

As far as the numbers go, however, all that is pure conjecture. Wall Street projections earlier this year have proven to be a bit optimistic. But most measures are slowly but surely coming off the mat. That even applies to the construction industry, which reported higher spending on commercial projects for the first time in two years as well as the most homebuilding spending in 27 years.

Moreover, todays GDP report also included a final figure for the first quarter 2010: growth of 3.7 percent versus a prior estimate of just 2.7 percent. To be sure, these are basically half empty, half full arguments. But in an increasingly political environment where politicians and partisans are going to shape the number to their arguments, its critical to keep this one fact in mind: The economy is still growing, even in the US.

Although consumer spending was up just 1.6 percent, Americans did save 6.2 percent of their disposable income on average in the second quarter. Capital spending by businesses on equipment and software soared 21.9 percent. Thats an investment in future growth that may take a while to pan out. But its a far cry from the dire straits this economy was in a year ago. And it clearly doesnt support the thesis of a double-dip.

The potential for a jump in interest rates has long been a big-time worry for income investors. Worrying about it now, however, is extremely premature, to say the least.

First, income investments from utility stocks and master limited partnerships (MLP) to Canadian trusts and real estate investment trusts (REIT) have been decoupled from so-called benchmark interest rates for more than two years. In fact, these rate-sensitive stocks have generally moved counter to the 10-year Treasury note yield.

On days when the economic news has been good, MLPs et al have rallied hard as investors have lost their fear of potential business woes and threats to dividends. On days when the news has seemed to suggest weakness, bonds have rallied and MLPs, utilities, etc. have sold off. Thats in fact what weve seen this week.

In other words, most traditionally rate-sensitive fare is, in this environment, economically sensitive. That means we can look forward to further gains as the economy recovers, even if benchmark Treasury rates rise.

Second, its also a bit premature to forecast a sharp rise in Treasury note yields. The 10-year yield is now below 3 percent, one of the lowest rates in history, exceeded only by the 2.153 percent set back in late 2008 at the height of the credit crunch. And with the Federal Reserve set on continuing quantitative easing to fight deflationat least according to widely publicized statements by the governorstheres little risk from a rate boost there either.

Finally, Corporate America has been taking advantage of a year of generation-low interest rates to reset balance sheets to their strongest levels in decades. Companies with hefty refinancing needs have been able to do so and save interest costs in the process.

As a result, theres little risk to a spike in rates either short or long-term for Utility Forecaster recommendations. Theyre in better shape to handle a new crisis than they were in 2008, when they kept on pumping out profits despite the worst credit, market and economic conditions in 80 years. Neither is there a risk to deflation, which will keep borrowing rates low as long as it lasts.

Some investors have worried about the potential for the BP (NYSE: BP) oil spill in the Gulf of Mexico to usher in a harsh new era of regulation for oil and gas producers. To be sure, theres a bill on Congress now to up the cost for producers to cover damages from drilling.

That could boost the cost of offshore drilling substantially in coming years. At this point, however, the industry appears to have headed off the worst. Even fracking, or hydraulic fracturing, has cleared a major environmental hurdle large producers like Chesapeake Energy (NYSE: CHK) have come clean about chemicals used in the process.

That keeps the door wide open for further development of shale reserves across North America and the ongoing acceleration of investment in needed infrastructure such as pipelines, processing facilities and storage. As for offshore drilling, the oil is still there. But only the big boys will have the wherewithal to get at it. Thats good news for the likes of Chevron (NYSE: CVX). which has also had the opportunity to learn from BPs mistakes in a painless way to avoid similar missteps.

Energy companies could, of course, be hurt badly if the economy should slip into a double-dip recession. Even if that happens, however, the survivors of the 2008-09 meltdown are going to be in better shape to meet its challenges, as theyve remained generally conservative during this recovery. And if the economy avoids such an unlikely debacle, prices are set to rise from growing demand in Asia.

Higher investment taxes are fourth worry for income investors. As it stands now, taxes on dividends are set to rise to ordinary tax rates on Jan. 1, 2011, when President Bushs tax cuts expire. That, however, looks increasingly unlikely. In fact, the only real debate about preferential tax rates is who theyll apply to.

President Obamas proposal is still to lift the top rate to 20 percent. In my view, that remains the most likely scenario, though we may not see it pass until next year as election season heats up and tax rates on the wealthy become more of an issue. But there does appear to be a consensus to extend the rates.

One further point on taxes: The carried interest legislation thats passed the US House of Representatives does not apply to energy-focused MLPs or to the general partners whose only asset is a controlling interest in the MLPs. In fact, the legislation carves out specific exemptions for energy-focused MLPs.

What are at risk are financial focused MLPs such as AllianceBernstein Holding LP (NYSE: AB) and these should be avoided. But if you own the likes of Enterprise Products Partners LP (NYSE: EPD). theres absolutely nothing to worry about.

Last but not least, regulation remains a worry for many. Certainly, health care and financial legislation passing Congress this year are wide-reaching and impact many industries and companies. Neither industry, however, is a stranger to government controls. And its pretty clear the radical provisions in both acts were stripped out as the price of overcoming Senate filibusters.

Moreover, odds of other sweeping regulation passing Congress this year are practically nil. That applies to carbon dioxide regulation, which in fact was favored by much of the electricity sector. And if political polls are to be believed, the next Congress will be even less disposed to radical solutions, and more focused on compromise.

The time to worry about new regulation is when a new government comes into officeand this is not such a time. The Obama administration has changed the playing field in some respects for business. But companies have adjusted, with more than a few using the changes to their benefit. And thats always the key to wealth-building in a world where the governmentlike it or notis always a major player.

The bottom line is market volatility can provide opportunities for income investorsif youre focused on the right sectors and exercise the proper buy discipline.

Editors Note: For additional information on this topic, check out Roger Conrads latest report on High-Yield Dividend Stocks .