That '70s Show Rerun?

Many of you will have recognized by now that the unattributed economic quotes I used are from a Time Magazine article dated Dec. 9, 1974. Follow the link and read it! Nineteen hundred seventy-four was an especially distressing time, with a raging bear market under way and an economy sinking rapidly into a serious recession. I ran the juxtaposition to make the point that while our economy is struggling now, we've seen it all before, and the world will recover and move on. It can feel like we are at risk of falling into a new depression, but that feeling, too, is always prevalent near bottoms. Time rebukes it well:

Some consumers are so alarmed that they are muttering about a return of the Great Depression of the 1930s. Those fears are exaggerated to the point of unreality and betray a dimming of memories of just how nightmarish the 1930s were. Between 1929 and 1933, unemployment surged to 25% (it was still 10% on the eve of World War II), industrial production plunged by more than 53% -- compared with 2% in the current recession so far -- weekly wages fell 33%, and corporate profits disappeared altogether. Not even the most pessimistic economists foresee anything remotely comparable to that catastrophe.

Some folks mocked Warren Buffett for being early (i.e., wrong) in his Buy American pronouncement in October, but this environment is as close as we'll get to that great environment in the early 1970s that he described as being like "an oversexed man in a harem." We all sit around wishing for a market that provided great companies trading at single-digit P/Es, or close to cash or book values, yet when they come, we scare ourselves out of buying. Buffett was early; he penned the article on Oct. 17, and the S&P 500 is down 7.7% since then, but using a holding period of even two or three years tilts the risk/reward balance heavily in his favor.

I see four economic outcomes from where we are now:

1. "Normal" recovery over the course of the next year or so. Stocks are a buy here if so.

2. Depression. Stocks are a sell here. I see the odds of depression low given the massive stimulation we are seeing from the government.

3. Stagflation. The economy recovers modestly, but the huge money creation begets inflation. This would be bad for the economy, but in an inflationary environment, you want to own stocks, at least those with pricing power. Companies can react to inflation in ways that bonds cannot.

4. "Turning Japanese." This is the riskiest scenario, and most likely if we don't see a normal recovery. We could just go nowhere for a decade.

Now that the pain and panic of the last three months are subsiding, however, investors need to be open-minded about the long-term earnings power of many of the companies that have been beaten to a pulp.

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Gary T. Dvorchak, CFA, is a managing partner at Aviance Capital Management, a Sarasota, Fla.-based institutional investment manager. Gary is the portfolio manager of the Landmark Capital Disciplined Growth Fund, ticker LCDGX. The portfolio is posted on Stockpickr.com under Aviance Disciplined Growth in the Professional Portfolios section. Gary's column, The Disciplined Investor, appears regularly on RealMoney Silver.

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