As stocks swing wildly, experts urge investors not to panic

A pair of specialists work Friday at a post on the floor of the New York Stock Exchange.

NEW YORK -- Is it time to sell everything or buy with abandon?

The swings in U.S. equities last week are unprecedented in the history of the U.S. stock market, according to data compiled by Birinyi Associates, Bloomberg News, and Howard Silverblatt, senior index analyst at Standard & Poor's.

The Dow Jones industrial average swung more than 400 points four days in a row -- down, then up, then down, then up.

It's frightening, but experts say the fear results partly because memories of the financial meltdown of 2008, when stocks lost half their value, are fresh.

Their advice: Hold tight.

"The stock market has done so well historically that, even if it is overpriced, you're likely to do OK," said Robert Shiller, a Yale University economist famous for having warned against bubbles in technology stocks and housing.

Although he believes the stock market is still overvalued by historical averages, he said it is closer to fairly valued than before.

He suggests investors move their money "modestly" into stocks.

A pair of widely respected gauges of market value suggest stocks are no great bargain.

But since the Great Depression, shallow bear markets -- drops of 20 percent or so in stock prices -- are much more common than the huge plunges of 2008.

Of the 12 bear markets since the Great Depression, only three have had drops of 40 percent or more, said Sam Stovall, chief investment strategist at Standard & Poor's.

The market isn't quite in bear territory yet.

The Dow finished Friday up about 1 percent. Since the market's highs of April 29, the Dow is down 12 percent. The S & P 500 index is down 13.5 percent.

Although history is only a rough guide, Mr. Stovall said he suspects that any coming bear market won't be severe and will end quickly. Bear markets last a year and five months on average.

Mr. Stovall said investors tend to dwell on the stock market's recent past, so they're selling now because they fear a repeat of the 2008 collapse. In the year and a half ending March 9, 2009, stocks dropped 57 percent.

If the financial crisis had happened in 1988, not 2008, it wouldn't be on most people's minds.

"The market is down because people remember getting sucked up in the previous bear market," Mr. Stovall said.

Many Wall Street pros say not buying stocks now would be foolish. Prices seem low compared with what stock analysts expect corporate profits to be this year.

But in recent weeks, they've barely touched their projections despite slowing U.S. economic growth and mounting European debt problems.

Besides the possibility the pros are too bullish about earnings, there are two major reasons to worry:

● Investors fear that Europe's debt crisis could spread to Italy and Spain and lead to big losses at European banks that have lent to the nations that are in trouble.

● The U.S. Federal Reserve signaled last week that it would keep interest rates super-low for two more years because of expectations that unemployment will remain high and economic growth will stay slow.

The Fed's decision came after the government said the U.S. economy had barely expanded in the first six months of this year.

Fortunately, the United States is in better shape than it was before the financial crisis in 2008, so stocks may not crater. The financial system is more stable, and the biggest U.S. companies have amassed an impressive rainy-day fund -- $1 trillion in cash.

Robert Doll, chief equity strategist for money manager BlackRock in New York, is bullish on stocks because so many companies are making money overseas. That means trouble in the U.S. economy matters less to U.S. stocks.

Curtis Jensen, chief investment officer of Third Avenue Management, also likes the international exposure of many U.S. companies. His firm, which manages $15 billion in assets, put $210 million into stocks on Monday and Tuesday.

One way of looking at stocks is to compare their prices with Federal Reserve estimates of something called book value -- what a company would have left if it had to shut down, sell its assets, and pay back its lenders.

According to Andrew Smithers of Smithers & Co., an investing consultancy in London, stocks over the past century have traded at about 0.64 this measure.

Today, the S&P 500 is trading at 0.93 this measure -- suggesting stocks are too expensive. Mr. Smithers said he's not buying now.

"I'd be wary of putting too much in the market," he said. "There's a good chance they'll fall. It's hard to predict the market."

Meanwhile, individuals seeking safety in cash amid the market turmoil can take advantage of several methods to insure millions above the Federal Deposit Insurance Corp.'s $250,000-an-account limit.

A husband and wife could each have $250,000 in individual bank accounts, the maximum covered by FDIC insurance, and $250,000 each in retirement accounts such as IRAs invested in bank products rather than mutual funds or annuities.

They also each can set up $250,000 trust accounts naming each other as beneficiaries and deposit an additional $500,000 in a joint account, where each co-owner is insured up to $250,000.

"That total comes to $2 million fully insured," said David Barr, an FDIC spokesman.

Savers who want to put their money into certificates of deposit should do so now because rates will continue to drop, said Dan Geller, executive vice president of Market Rates Insight in San Anselmo, Calif. "It's inevitable as long as the current economic conditions remain," he said.

JPMorgan Chase & Co. lowered its yield in the last week to 1.75 percent from 2 percent for a new five-year CD with a minimum deposit of $10,000, Tom Kelly, a spokesman for the New York-based bank, said in an email on Aug. 10.

The national average yield as of Aug. 10 on three-year CDs is 0.91 percent and 1.54 percent on five-year CDs, according to Bankrate.com.

The top-yielding online, FDIC-insured savings accounts are returning 1.1 percent, Bankrate.com said.