by Paul R. La Monica,

The labor market in the U.S. is still anemic, the deficit is rising and people are worried about the possibility of higher taxes on banks and other businesses. That could put hopes of a sharp recovery here in jeopardy.

Making matters worse, there are growing concerns about the financial health of many European nations. And if all that wasn't enough to worry about, some fear that the breakneck growth in China could suddenly cool as people start using the dreaded B-word (bubble) to describe its stock market and economy.

With all that in mind, a key measure of market volatility, the VIX, shot up more than 20% on Thursday and was flat Friday. This capped a wacky week on Wall Street in which stocks soared Monday and Tuesday and plummeted Thursday. But when the dust settled, the Dow and S&P 500 finished the week down less than 1% (the Dow managed to come back from triple digit declines on Friday to close above 10,000) and the VIX was up 6%.

So what's this mean? The bad news is that it does seem to indicate that investors are finding new things to fret about and that these worries are overshadowing what by most accounts was a solid round of fourth-quarter earnings reports from many blue-chip companies.

The good news though is that this is still a pretty mild freak out, relatively speaking. After Thursday's VIX move, it is still less than half of the level it was at last March. And at about 26, it's still a bit below the 30 level that traders tend to think is a sign of real abject market terror.

A sense of panic has returned. But I don't think it's anywhere near a meltdown like we had in late 2008 or early 2009," said Bob Phillips, co-founder of Spectrum Management Group of Raymond James & Associates, a money management firm in Indianapolis.

Phillips said he thinks that U.S. stocks, Treasury bonds and the dollar could benefit from this turmoil. That's because he believes investors will eventually take notice of the improving economic and corporate fundamentals here.

In other words, investors may flock to U.S. assets simply because problems in America are far less dire than in Europe. If that's the case, then the recent retreat in the prices of oil, gold and other dollar-denominated commodities may continue as the dollar strengthens.

Walter Gerasimowicz, chairman and CEO of Meditron Asset Management, shared that view.

"Let's not be totally pessimistic here. On the positive side, earnings have been quite strong and people are not paying attention to that," he said. "One has to stomach this volatility. But a recovery is underway."

Not everyone is so sanguine.

Dave Rovelli, managing director of U.S. equities with Canaccord Adams in New York, said that the Europe concerns, combined with uncertainty about what new laws from Washington may mean for the markets, could keep people on the sidelines. He said that's what happened Thursday.

"There is a lot more fear in the market because of Europe and this could be infectious. Everybody's scared and they were not buying stocks. It was more of a buyer's strike than a big sell-off," he said.

Thomas Girard, portfolio manager for the MainStay Principal Preservation Fund, said he's worried that even if Europe's problems subside, people will turn their attention once again on the less-than-stellar recovery in the United States.

He said he's particularly concerned about how the economy will hold up now that the Federal Reserve seems to be unwinding many of its emergency lending programs for banks.

"Are the economy and markets able to stand on their own two feet without stimulus and other support? We are of the view that the economy is on a slow mend," he said. "If the dust does settle down and you don't have any major shakeouts from overseas, investors will focus on the fact that the economy is just slowly healing."

But the funny thing is that none of this week's reasons to worry are really all that shocking. These concerns have been percolating for awhile. For whatever reason, the sentiment pendulum definitely seems to have shifted to pessimism right now. How long it stays there is almost impossible to know.

"There are still a lot of unknowns out there. The macro environment is still driving the market, whether it's China and its interest rate policy, Europe and its problems coming to a head, or budget deficits," said John Derrick, director of research with U.S. Global Investors in San Antonio. "These aren't new phenomena but people are more focused on it."

Reader Comment of the Week

Milton Boden wins this week's honors for these remarks tied to Wednesday's column about the "just okay" market. I think he speaks for many who believe that the Wall Street rally is not doing anything to help the average consumer.

"The large amount of dollars in the hands of investors, including foreign entities, has disconnected the market from its fundamentals. All these dollars need to go somewhere and the U.S. stock market is probably less risky than many other investment options. These dollars are not flowing to the consumer or to small businesses where they could spur rapid growth," he wrote.