This blog post originally appeared on RealMoney Silver on Jan. 13 at 7:52 a.m. EST.

A reasonably meaningful and consistent improvement in the credit markets over the past two months, which produced rising confidence and increased complacency, has been replaced in the first few days of 2009 by the reemergence of fear.

At front and center of that fear has been the banking industry, served up by a shotgun wedding of the brokerage businesses of Citigroup ( C) and Morgan Stanley ( MS), a merger that might as well be called Citi-Morg! Not surprisingly, an unforgiving market reacted skeptically to the proposed merger, which appears to be an attempt by capital-starved Citigroup to make chicken salad from chicken scat. As well, indications are that the major money center banks will cap off 2008's final stanza with king-sized losses.

It is clear that the tsunami of despair on the part of many market participants in 2008 has not passed with the coming of the new year, nor has the uncertainty of the timing and of the ability of a new administration's unconventional and massive stimulus to stabilize economic activity been put into any better focus.

One of the hallmarks of the long market downturns in the 1930s and the 1970s has returned: Rank and file investors are losing faith in stocks.... In the grinding bear markets of the past, huge stock losses left individual investors feeling burned. Failures of once-trusted firms and institutions further sapped their confidence. Many disenchanted investors stayed away from the stock market, holding back gains for a decade or more.... Today's investors, too, are surveying a stock market collapse and a wave of Wall Street failures and scandals. Many have headed for the exits: Investors pulled a record $72 billion from stock funds overall in October.... If history is any guide, they may not return quickly.

-- The Wall Street Journal (December 2008).

An extended period of investor disinterest and apathy seems ahead of us as the giddy optimism of the past is now a distant memory. By contrast to the previous cycle that reached its zenith in mid 2007, the emerging cycle is different not only in degree but also in kind.

I remain of the view that the S&P 500 will be within a broad range of approximately 10% in either direction for the foreseeable future, with downside risk and upside opportunity roughly in balance.

With that expectation, investors should continue to err on the side of conservatism and should focus on the return of their capital as opposed to the return on their capital.

Doug Kass writes daily for RealMoney Silver , a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.


Know What You Own: Citigroup operates in the money center bank industry, and some of the other stocks in its field include JPMorgan Chase ( JPM), Wells Fargo ( WFC), Bank of America ( BAC), Royal Bank of Canada ( RY) and Toronto-Dominion Bank ( TD). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.

At the time of publication, Kass and/or his funds were short Toronto-Dominion Bank, although holdings can change at any time.

Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Long/Short LP.

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