Mr. Market's Wildest Ride

Today’s violent mood swings capped one of the worst weeks in stock market history. (It’s not always fun to be part of history in the making.) Fortunately, stocks recovered sharply in the late afternoon, so that the averages were down 1% or less today (a few were even positive). At one point, the Dow Jones average soared over 1,000 points from its low in just 30 minutes. Talk about volatility!

This weekend, the G-7 ministers are meeting in DC, and all eyes are on them. I suggest you forget about this. Also forget about whether or note the economy will suffer a long and deep recession. Forget about the credit crisis. None of these have anything to do with stock prices any longer. At this point, it’s all about perception.

Over the past couple of weeks, as the averages tumbled at rates rarely seen, there have been 2 primary types of sellers:

1. Those selling because the want to, mainly out of abject fear (usually accompanied by some seemingly rational explanation, which is just cover for the underlying panic); and

2. Those selling because they have to, mainly hedge funds and other leveraged institutions that have been receiving margin calls (demands for cash) at a rapid rate.

Virtually none of the selling has come from a cold analysis of the facts. Because if you take a step back (and a big breath), you’ll see that stocks are cheaper by almost any measure than they have been in our lifetimes. Cheaper than 2002. Cheaper than 1990. Cheaper than 1982. We’re talking 1949 and 1932 cheap. It all makes no sense.

Here’s something to keep in mind: During the Great Depression, US stocks bottomed in July 1932, just after FDR was nominated. Over the next 18 months, they rallied +187%, starting a full 9 months before the economy began to grow again (after shrinking 30% over the prior 3 years). By the end of 1936, stocks had risen +368% (that’s 4.7 times) from their lows.

There’s only one question you need to ask yourself when deciding whether to stick with stocks (or even buy more): Is the world about to end? If the answer is “Yes,” sell everything (not just your stocks), buy gold and diamonds, lots of canned food and ammunition, and hole up in a bunker. If the answer is “No,” then stocks are now the best place to be.