Alan Greenspan taught us to worry about irrational exuberance, the stock market's manic phase. But there is the flip side of the cycle in which investors seem to expect a depression, hate stocks no matter how cheap they get and click the "sell" button as thoughtlessly as they bought the Nasdaq at 200 times earnings.
Illogical lugubriousness, we can call it.
At the one point last week shares in the Standard & Poor's 500 index were 10 percent cheaper than they were a month ago, although they recovered somewhat on Friday. For the most part, however, the prospects of those 500 companies are the same as they were in July, and now they're selling at a discount.
Even after Friday's recovery, U.S. stocks are close to being as cheap as they've ever been since 1995, as measured against earnings. The market's recent plunge means it takes only $16 to buy $1 in S&P 500 profits. S&P 500 companies spin off annual dividends of 1.9 percent - almost half the payout on a 10-year Treasury note. And there is no reason to think profits and dividends won't increase over the long term.
U.S. corporate profits increasingly depend on sales overseas, and the planet is enjoying perhaps its biggest boom ever. Europe's economy is finally growing. Japan's is still struggling but shows progress. Millions of people are escaping poverty in China, India, Brazil and elsewhere. Such emerging economies will surely experience ups and downs, but their billions in foreign-currency reserves reduce the chances of a 1998-style meltdown.
True, the American economy faces problems.
The homebuilding business and anything connected with it will go into a trance. Homeowners trapped in bad mortgages will experience real grief.
A rise in foreclosures and a decline in home prices will hurt consumer spending. The crew cut being given Wall Street financiers will affect Learjet and caviar sales.
But there are reasons to think the country will avoid a recession, a spike in unemployment and big hit to corporate profits.
First, recessions are much rarer these days. Thanks to computerized supply systems, the overproduction and inventory buildups that once triggered bad slumps are largely history. As demand declines, producers should be able to adroitly adjust supply and avoid the unsold goods and layoffs that once turned mild slowdowns into recessions.
(Of course, the glaring exception is the housing business, where supply greatly exceeds demand at current prices. Maybe homebuilders need an electronic data interchange system like Wal-Mart's.)
A cheap dollar will help exports. Inflation, the one factor that could throw the economy into old-fashioned, 1970s-style slump, is declining. So are long-term U.S. interest rates, although probably not fast enough to save the country from somewhat of a slowdown. After the credit markets sort themselves out, qualified borrowers should be able to get less expensive loans, and that will limit the damage.
The plummet in most stocks and bonds has less to do with their intrinsic value than with Wall Street idiosyncrasies. Financiers are dumping securities because they bought them with borrowed money, and now lenders are forcing them to sell to replenish collateral. At the same time, investors worry that credit-market upheaval signals an end to buyout firms' ability to take companies private at a premium.
But their loss can mean opportunity for others. The American companies that the buyout jockeys found so attractive are still for sale every day for the rest of us, via your friendly no-load, indexed mutual fund.
This is not a recommendation to plow big cash into the S&P 500 tomorrow. The turmoil is not over. Expect more bombshell announcements in the housing-finance market. Mutual funds are low on cash, which will limit their stock purchases and could keep shares from bouncing back. The amount of borrowed money propping up U.S. shares is still quite high. Hedge funds will probably face big redemptions, which will force them to sell stocks.
You should never be in stocks if you need the money in the next five or 10 years, and the best way to get in is gradually.
That said, U.S. stocks have outperformed just about every other investment over long periods, even when purchased at what appeared to be high points at the time.
That's easy to forget when the Dow is plummeting and the headlines are big and gloomy. It can be hard not to join the crowds at the "sell" window. Illogical lugubriousness, however, can be just as bad as for your wallet as irrational exuberance.