If by some chance you were visiting another planet last week, you might be wondering what all the fuss is about.  For the uninformed, it was just another week of stock market recovery and positive gains for portfolios. How would you have any idea that to generate those gains the market would experience historical volatility that included a brush with financial Armageddon?

What’s that you say?  Something about an experiment in socialism? Oh, that’s right, there was that itty-bitty item of a massive government bailout of Wall Street and the banking sector in general.  Never mind the details, we made money right? Who cares what happened in the market on the way to profit, right?

In most cases, that would be the answer to that question.  Most long-term investors really needn’t be worried about daily gyrations in the market unless there has been a dramatic change in underlying value or economic circumstance. Well, I hate to be the bearer of bad news, but what transpired last week rises to the level of where you should care... and care deeply.  As some say, we are living and breathing a 100-year event (see also, "AIG Armageddon").

The question now for investors is what should we do now?

What to Do Now

Obviously, the market was very bullish on the plan in the short- term.  We avoided the abyss in the short run, and given that stocks were down and falling further we did seem to avoid a much larger drop (see "Profit as Lehman Folds & Merrill Disappears"). The question I have for you is how close did we come to the abyss? The answer to that question is quite important and should provide a clue as to what we should do going forward.  If we were that close to calamity, how in the world were stocks able to perform as well as they did early in the week?

There was a huge disconnect between what was happening in the stock market versus what traders experienced in the credit markets. The credit market appeared to be trading on fear and fear alone, as investors scurried away from risky money market investments and into Treasury bills.  The rush was so great for Treasuries that at one point during the week, the yield on those T-bills was negative!

Think about that for a minute. 

Investors were willing to pay a price in return for knowing that principal would be returned.  That move, mostly by very large institutions, created a chain reaction that ultimately resulted in the government rescue (see also, "Global Revolt Melts Down U.S. Financials"). The big issue is that lending, including the commercial paper market, essentially ceased to operate.  That meant that companies depending on...