Summer roller coasters are supposed to be fun.
But last week's stomach-turning ride on the stock market -- including the first time in the 115-year history of the Dow Jones Industrial Average that it moved more than 400 points for four consecutive days -- was more like a terror ride on an out-of-control Big Dipper.
Still, despite all of the market's Sturm und Drang, the Dow ended the whipsawed week off just 1.5% -- only 175 points from where it began. The Standard & Poor's 500-stock index and the Nasdaq Composite took equally wild rides before ending down just 1.7% and 0.96%, respectively.
All three of the major indexes are down for the year: 2.7% for the Dow, 6.3% for the S&P 500 and 5.5% for Nasdaq.
The market's wild ride, which actually began two weeks ago, has left investors torn between worries of another recession and hope that stocks are at bargain-level prices.
The turbulence picked up late last month when European leaders unveiled their latest plan to bolster Greece and some investors began to worry about problems in Spain, Portugal, Italy and even France. By last week, concern focused on large European banks, many of which are holding the weakening debt of the continent's various nations.
Much as U.S. subprime-mortgage problems bled into Europe and the rest of the world in 2008, Europe's mounting troubles are affecting the U.S., which faces its own challenges. Among them: more than $14 trillion of debt, thanks, in part, to two wars and several years of muted or no growth -- a burden underscored by the recent downgrade of the country's credit rating by Standard & Poor's.
The ugly political sparring before Washington raised its debt ceiling and agreed to trim the nation's debt raised questions about the nation's leadership and convinced many investors that the government won't take aggressive steps to bolster the U.S. economy. That's troublesome because the economy hasn't been able to grow at a pace of more than 2%. Some hope the Federal Reserve will again take aggressive steps, such as buy bonds, to spark the economy. The Fed last week promised to keep interest rates low until at least 2013, buoying markets. But it's not clear how much the Fed can help spark growth.
So all is lost and investors should dump their holdings? Thankfully, no. As Treasury prices surge, as investors search for safe investments, that's pushed mortgage rates lower, something that could give a shot in the arm to those looking for a home or to refinance existing mortgages. Gas prices also are dropping.
Meanwhile, corporate earnings have been strong lately, while retail sales have held up. Executives have been reasonably upbeat about the rest of the year. Unlike during the 2008 downturn, companies and consumers enjoy much stronger balance sheets. Non-financial companies in the S&P 500 hold $1.12 trillion of cash and short-term investments, according to the most recent tallies, up 59% from the third quarter of 2008.
And U.S. stock prices now are at reasonable levels, some analysts say. That's very different from 2007 when the housing market was in a bubble and stock prices very high.
"U.S. banks don't have toxic mortgages, and there's less leverage in the financial system," notes Stephen Roseman, who runs the Thesis Flexible Fund. "Companies are still reporting good numbers."
One thing seems clear: The U.S. and global economies will grow at a slow pace during the rest of the year, and maybe longer, especially as consumers begin to digest their reduced 401(k) accounts. A U.S. recession may not result but it likely will feel like a recession for many businesses and consumers. At the same time, Europe's debt troubles likely will hound it for the foreseeable future.
Given that discouraging backdrop, it's best to keep ample cash on hand, hold investments that could do well if things deteriorate, and focus on companies and investments that can prosper in a weak environment.
"You want to be less aggressive, which means hold more cash, shorter maturity and higher-grade bonds and large-capitalization stocks," says John Brynjolfsson, who runs hedge fund Armored Wolf. He discourages investors from shorting stocks or using leverage.
Mr. Roseman, who says he has reduced his exposure to companies reliant on the debt markets and on selling to consumers, is a fan of master limited partnerships, which mostly are companies that own and operate pipelines, primarily for natural gas and oil. They usually pay out cash to investors at rates much higher than yields on bonds and have stable cash flows. Teekay LNG Partners LP (TGP), for example, has a yield of nearly 8% and has long-term contracts, Mr. Roseman says.
KKR Financial Holdings (KFN), a specialty finance company that owns various debt and has a yield of 9.5%, is another pick of some investors.
Dan Rice, manager of the BlackRock Energy & Resources Fund (SSGRX), one of the top-performing energy-focused funds over the past decade, is a fan of Range Resources (RRC) and EQT Corp. (EQT), energy companies with holdings in the Marcellus Shale, a rock formation underlying several states in the Northeast that has become one of the most prolific sources of natural gas in the U.S. (For more stock picks, see this week's Barron's Insight column by Andrew Bary.)
Robert Wiedemer, co-author of the book "Aftershock," and managing director of Absolute Investment Management, says investors should have ample amounts of gold-related investments in their portfolios, such as the exchange-traded fund SPDR Gold Trust (GLD). Gold could do well even if central banks become more aggressive because such actions could lead to higher inflation.
"Newmont Mining [NEM] offers something gold itself does not -- a dividend of more than 2%," says Darren C. Pollock, portfolio manager at Cheviot Value Management. "And the company has enough ounces of gold in the ground, and a low enough cost of extracting that gold, to make a case for the shares to easily be worth 50% more than the current market price."
Write to Gregory Zuckerman at firstname.lastname@example.org