I'm not going to mince words. The U.S. Congress showed its true lack of leadership, and its total ineptitude in the face of the worst economic crisis in the last 80 years. Congress is holding the world hostage, in the face of an election. This may be the first time in a few years that I have felt that George W. Bush, who has nothing to gain from pushing the $700B package, appeared to be acting in the best interests of the United States (and the world for that matter), while the U.S. Congress was doing just the opposite. In order to get re-elected, these people are willing to vote down an economic plan to unfreeze the credit markets (not "bailout" the financial system, as everyone is stating) by purchasing already discounted debt-backed securities, providing much-needed liquidity to the banking system, so that they can lend to each other, and more importantly open credit markets up for businesses and people. I'm surpised the markets didn't fall further. You only have to look at the terrible deal Caterpillar had late last week to see how bad it has gotten.
A company of the caliber and creditworthiness of CAT having to pay huge premiums in the credit market makes me question whether many companies will even be able to borrow to finance short term cash requirements, like employee salaries and working capital requirements. This means obvious things to me: companies are going to hoard cash, reduce their payrolls by cutting staff, and reducing capital spending over the next year. This ultimately will result in pushing us further into a deflationary market, worldwide. A credit crisis as intertwined as this means no country is immune to its issues. Deflation is the worst disease to strike an economy. It results in a downward spiral - this toilet will flush like it's broken, and we don't have a plumber to fix it. As deflation occurs and Wall Street suffers, people on Main Street will lose their jobs, lose their homes, lose everything - I'm not trying to be an alarmist, but the market needs intervention, because it won't resolve itself until most banks in the U.S. fails (the small regionals - remember, over 1,000 failed in the 1980s and 1990s in a less serious crisis). We only have to look at the Japanese markets to see that this can be a long drawn issue. Eighty years of inflationary growth presents a potentially long-term deflationary issue for the markets.
So what does one do in this market? The only thing I can see myself doing (and I'm not an expert nor am I recommending you follow my advice) is reducing risk and buying the companies that I feel are best of breed. I will not be selling in this market: as much as I hate the actions of the US government, I still feel that things can change in an instant, and I know that I am not smarter than the market. Not only will I maintain my asset allocation while facing this uncertain and tough market, I will actually add to my portfolio in stocks with little or no debt, but only in cases where their competitors have moderate to vast amounts of debt. Stalk these companies - they are being punished in the down market, and they may earn less money in the future. However, these companies will have pricing power, and they will have long term competitive advantages. As their competitors fail or downsize, they will be able gain market share for many years to come. And if they haven't raised money in the equity markets (as a substitute to the credit markets) over the last 3-5 years, even better. These companies are growing organically, and won't need capital while others suffer looking for it, and getting punished in a risk-averse market. In my retirement accounts, where I hold no individual stocks, I will simply continue my pre-authorized purchases, and re-allocate at the end of October.