Stock market activity always has an element of psychology in it, but it usually reacts to such mundane events as corporate earnings and on occasions comments from the Federal Reserve Bank’s Chairman Alan Greenspan. 
This all changed on September 11th after the terrorist attacks in New York and Washington, DC, that killed thousands of people and triggered what will likely be a long war on terrorism. Some of the biggest moves in the stock market have been driven by strong emotions.

These events have affected the markets in such a way that investors are acting on fear instead of on prudent investment decisions. Investors are feeling that now is the time for cash. Cash means moving investments to money market funds, certificates of deposit, passbook accounts, or for that matter, under mattresses. They are adamant right now about avoiding risk and that risk aversion creates investment opportunities for savvy investors. 
From around the end of September, the Dow Jones Industrial Average is down about 25 percent from its high, but it still has more than tripled since the start of the last bull market which began in October 1990. Although the Nasdaq Composite Index has fallen 70 percent, it is up 355 percent in that period.

The market’s reaction is purely psychological. There is no logical reason for stocks to sell when crises hit. The shocking nature of a major event often makes rational thought more difficult.

Whenever there is a traumatic event happening in society, people tend to be depressed, irritable, and confused. In that context, rational decision-making becomes very difficult. People tend to begin to let their thought processes be guided by their anxieties. Instead of focusing on the historical resiliency of the stock market and the economy, investors choose to focus on short-term problems.

Frightened investors shorten their time horizon dramatically when investing. Some investors will sell because they see their portfolios crumble and they fear they will have nothing left. It’s not rational, but it does happen.

After every major crisis in the past century, including the bombing of Pearl Harbor, the Cuban missile crisis and the assassination of President John F. Kennedy, the Dow Jones industrial average sold off sharply at first.
After 11 such crises, the Dow rebounded and gained, on average, 33 percent in the next year and 52 percent two years later.

• Some analysts expect an upturn in the market by next year. When examined, all postwar bear markets found the average length to be about 12 months with an average decline of 29 percent. As of the end of September, the current bear market had lasted 18 months with a decline of 37 percent. In addition, consumer sentiment bounced back a bit as the nation began to adjust to the after-effects of the terrorist attacks. The University of Michigan’s consumer-sentiment index rose to 83.4 in mid-October from 81.8 at the end of September and well above the low of 72 recorded in one week late in September. 

In its October meeting, the Fed cut its federal funds target rate a half percentage point to 2.5 percent and indicated it was more inclined to cut interest rates than to leave them alone. Since Alan Greenspan has been Fed chairman, 25 out of 29 times he has followed up on and lowered rates.
So, is this a good time to buy stocks? It’s a main topic of discussion on a number of market-related shows in every financial media outlet. For some investors, there is no time such as the present.

• The irony is that when the market rebounds as it always does, those who sold while stocks were on the way down will likely lose out when stocks recover.

For those with a long-term view of the market, this is one of the best-buying times for years to come. A look at any stock market chart in the past 60 years is a better guide. Severe market retreats, which make investors anxious, look like tiny blips in an upward-spiraling market.

What should investors do who want to go against the grain? With the aforementioned evidence, many analysts are positive about stocks. There is something to be said for moving against the crowd.When investors are risk adverse and running for cover, the crowd is clearly opposed to taking risks. That means the rewards lie not in avoiding risk but in taking it on. It makes a lot more sense to buy stocks now than it did one and a half years ago, when no one seemed to have any doubts at all and companies were bursting with confidence and promising astonishing earnings growth. Stocks seemed like a no-lose proposition then.

One approach would be dollar cost averaging into stocks that you already own or a stock market index for more diversification. The point is, if you’re a long-term investor the stock market will recover. The prices of solid companies that have shown consistent earnings in the past are looking like great buys at current levels. Does that sound appealing? Consult your investment professional, do your research and start some bargain hunting. 

Jodye Deal is the owner of Gazelle Associates (www.gazelleassociates.com), an investment planning firm based in Virginia. If you have any questions about investing please call Deal at (703) 995-4491 or send an e-mail to her via investing@gaze lleassociates.com.