Stocks are a sound long-term investment. However, before we can get to the long-term we must get through the short-term. We make no claims of clairvoyance but here are some of our opinions (not guarantees) about how events may unfold.

Since Lehman Brothers defaulted on September 14th, the S&P 500 Index has declined by 30%. There are few periods in the last 80 years when share prices have fallen so far, so fast. If history is any guide, it would be reasonable to see some sort of rebound in share prices. Even in 1929, the S&P 500 rose by nearly 45% between November and March 1930. At some point it would not be surprising to see a counter-trend move up of as much as 20% to 30%. That’s not a guarantee but an opinion.

What comes next will depend on how orderly the deleveraging process is. This is a global crisis and it will require a global solution. The international community has realized that no single country can solve the problems and members are working collectively to find solutions. As long as deleveraging is a significant force in the market, investors should consider holding cash reserves (backed by government securities) or high-quality bonds.

Common stocks are becoming attractively valued. By historical metrics, shares are trading below fair value but they have not reached levels that might be regarded as truly cheap. At any point in time markets are a manifestation of crowd psychology. Just as people were too euphoric in the late 1990s, they are becoming too pessimistic now.

We currently recommend below-normal exposure to common stock and above-average allocations to cash and bonds. The global economy faces some significant challenges in the next year or two but we have no doubt that we (the U.S. and the world) will get through this difficult time.

The time to begin to commit cash to equities will come when credit spreads begin to narrow and commodity prices begin to rise. Those things will likely occur long before the economic clouds have blown off the front page of the newspaper. Narrowing credit spreads will indicate the stress in the financial system is easing while rising commodity prices would be a sign that economic activity is beginning to accelerate.

Keep checking back to our website for periodic updates.