The Big Bank Bailout: Are You Next?

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Dan Danner, executive vice president of the National Federation of Independent Business, says most of his 350,000 members are "some combination of nervous, scared, in the trenches. At the moment, credit is not a problem only because they're in survivor mode, waiting to see if they're going to have customers tomorrow." David Guernsey, who owns an office-products firm in Chantilly, Va., knows the feeling. While less expensive items are selling, purchases of office furniture that are normally bank-financed are lagging. Customers are telling his sales staff, "We just need to circle the wagons and wait this thing out," Guernsey says. That's true among large corporations too. "People are putting projects on the shelf because the uncertainty came in so fast," a FORTUNE 100 CEO tells TIME. "Everybody in the boardroom is questioning, You want to reinvest now?" And if businesses stop spending, the pain will be felt in industries from steel to construction to carpets.

Resetting the Economy

So does anyone want to invest now? For many people opening their third-quarter brokerage statements, the news is grim. "Our call volumes are up 100%. We are just on fire here," says Gary Bhojwani, CEO of Allianz Life Insurance in Minneapolis, which sells annuities--insurance products that trade off risk and the potentially higher returns that stocks or bonds offer in exchange for a guaranteed payback. (Most annuities are guaranteed by state insurance regulators.) Investors who wouldn't know an annuity from a pineapple are asking one question: Is my money safe?

If you're thinking for the long term, it still is. To stock watchers, the flight to safety--capitulation, in other words--is a good thing, signaling that a market bottom is near. More important, though, says Tom McManus, chief investment officer at Wachovia Securities, is your own comfort level: "If you can't sleep, you have to sell down to the sleeping level--a mode where you are comfortable opening the statement and discussing it with your adviser or a family member."

Once you are well rested, then you can understand your risk tolerance and restate your goals, your investment horizon and your expectations. The standard advice is to continue to buy on a regular basis into a declining market because your average cost of buying shares declines.

Still, a lot of people are going to have to rebalance their portfolios to remain properly diversified and in line with their goals. "You can have an extremely negative view of the economy and use that to say, 'I am not going to go anywhere close to consumer discretionary stocks,'" says McManus. He'd opt for consumer staples instead, as well as health care, utilities and perhaps some beaten-down market sectors such as energy.

Certainly some stocks have been getting cheap. McManus points out that last Friday the dividend yield reached 3.3%, which was higher than the expected inflation rate. The last time this happened was during the 2002 sell-off, which presaged 26% market growth the next year.