Why We Still Like Stocks

The banking system is teetering. Layoffs are at levels not seen since the 1970s. Such well-known companies as Circuit City and Linens 'n Things have failed, and pillars of industry, such as General Motors and Chrysler, beg for government assistance to survive. Meanwhile, President Barack Obama says the U.S. economy faces its worst crisis since the Great Depression. As for the stock market, don't ask.

And yet, we recommend great blue chips to hold for years, small-company stocks that offer short-term opportunity, and retailers that should emerge even stronger after the current shakeout. Plus, a piece on reviving your 401(k) plan encourages employees with long horizons to stick with stocks.

We stand firm in our conviction that this is not the time to abandon stocks and that bold investors should add to their holdings. Why? Because stocks are cheap -- nearly 50% below their October 2007 highs -- and because many investors are so terrified that they're hiding their cash in the mattress, or in mattress equivalents.

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In this case, fear is a good thing. Take it from no less an eminence than Warren Buffett, who wrote in the New York Times last October that he was buying U.S. stocks because he follows one simple rule: "Be fearful when others are greedy, and be greedy when others are fearful."Buffett expressed confidence that years from now, the profits of America's great companies will be higher than they are today. He made clear that he was not making a short-term call on the market, something that he said he was incapable of doing.

One reason that timing is so problematic is that bear markets almost always end in the middle of recessions -- and it's awfully hard to pull the "buy" trigger when the news is so oppressively gloomy. But as the table below shows, the first year of a bull market is usually spectacular. You don't want to miss out on those bountiful years.

Even allowing for the market's tendency to look ahead, its gyrations can be remarkably confounding. Stocks experienced some of their most robust years ever in the midst of the Great Depression. After falling 86% at the outset, the market surged 54% in 1933, 48% in 1935 and 34% in 1936.

As dismal as things look now, the U.S. economy is unlikely to fall into a depression. Uncle Sam is spending $2.5 trillion to goose growth. Nations around the globe are initiating their own economic-stimulus programs. The decline in the price of oil represents a multibillion-dollar stimulus in its own right. You can get some car loans interest-free, and mortgages are going for 5% or so. The inventory of homes listed for sale dropped in January, suggesting that the housing market may be on the verge of stabilizing.

If anything, the economy could turn out better than the purveyors of gloom and doom predict. If so, stocks could deliver a pleasant surprise this year. And even if they don't rebound soon, they will certainly return to their long-term upward trajectory someday.