The Answer to the Panic Question

"Steve, all the financial news lately has got me really worried... I think the market could lose a quarter of its value here... what do you think? "

A friend sent this e-mail to me in what felt like a panic. I'll reply to him in today's DailyWealth.

Dear [friend],

Don't worry...

I know that's easier said than done. The markets are down, politicians are looking for someone to blame for the subprime mess, and there doesn't seem to be an end to the real estate troubles.

So it's quite normal to worry. Investors, in general, are more than worrying right now... investors are downright panicky.

I went back and crunched the numbers... and found that when investors panic, you want to be a buyer, not a seller.

Investors panicked in 1997 during the Asian crisis... but once the fear subsided, stocks shot up something like 20%. Investors then panicked in 1998 (during the Russian bond default/LTCM crisis). Once again, as the fear started to subside, stocks soared. As you can see in the chart, the S&P 500 shot from less than 1,000 to 1,400 in no time.

We had a few more panics... September 11, 2001, of course, but the S&P 500 rallied nearly 20% very quickly – and this was during a bear market! Late 2002-early 2003, as the U.S. invaded Iraq. Once again, as the uncertainty/panic subsided, stocks soared... The S&P 500 ran from 800 to 1,100.

We're in another panic now. But the fear is subsiding...

The Volatility Index (the VIX) is my measure of fear. Some call it the Fear Gauge. On Friday, it closed at 30. On Monday, it closed at 26. Today, it's around 23.

Now I can't guarantee that fear can't jump once again. As you can see from the chart, the Fear Gauge often has more than one spike to "scary" levels.

But if you ask me, I think we're closer to a near-term bottom than a top. I can be completely wrong, of course... The Crash of '87 set a record on the Fear Gauge, and we didn't get a whole lot of advance warning. Just days before the '87 Crash – the worst one-day drop in Wall Street history – the Fear Gauge was right in line with its average for the previous 12 months.

Instead of betting on a decline from here, this is what I see: Based on valuation, stocks are as cheap as they've been in a dozen years. The Fed is about to start cutting interest rates. And if you believe that you've got to be a contrarian to make money, the contrary thing is to believe in stocks when most people don't... and that's now.

Don't worry. And don't hustle out and sell things in haste.

Good investing,