Issue of the week: Is it safe to buy stocks again?

It’s always darkest just before the dawn. That old saw, said Jason Zweig in The Wall Street Journal, has special resonance on Wall Street. History shows that bear markets don’t end until virtually every investor is convinced that the plunge is irreversible. It sounds paradoxical, but only after investors throw in the towel—or capitulate, as traders say—can stock prices climb back out of their trough. “No one can spot capitulation before it sets in,” but last week’s worldwide stock market rout may have marked that crucial psychological turning point. The Dow Jones industrial average fell a stunning 18.2 percent for the week, the largest weekly decline in history, and the losses in London (down 21.1 percent), Frankfurt (down 21.6 percent), and Tokyo (down 24.3 percent) were even worse. If those scary numbers do indeed mark “the wholesale destruction of the stock market’s faith in the future,” then it might be time for intrepid investors to go bargain hunting.

And what bargains there are, said Alex Berenson in The New York Times. “By many measures, stocks are as cheap as they have been in the last 25 years.” On average, the stocks that make up the Standard & Poor’s 500 are trading at only 13 times their projected profits for 2009, compared with a historical average of about 21 times projected profits, and some big-name companies, including Nokia, ExxonMobil, and Boeing, are trading at less than nine times future earnings. That’s why some experienced investors say that now is the buying opportunity of a lifetime. “The most important securities are being given away,” said Martin Whitman, manager of the $6 billion Third Avenue Fund.

But some investors are wary of stocks at any price, said Jennifer Waters in Marketwatch.com. “At a time when market volatility is deflating 401(k) accounts and retirement nest eggs,” those with money and patience are looking at alternative investments, such as vintage wines. A case of 1990 Romanée-Conti Burgundy that originally sold at $500 a bottle recently fetched $14,937.50 per bottle at auction. Such returns are far from the norm, but vintage wine does have scarcity value. “There are only so many bottles of 1982 Château Cheval Blanc or the 1995 Screaming Eagle Cabernet Sauvignon left in the entire world, and no more will ever be made.”

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Investors who get back into the market too early will need a stiff drink, said John Authers in the Financial Times. Although the markets rebounded sharply early this week, with the Dow soaring an unprecedented 936 points on Monday, it’s still too soon to say we have nowhere to go but up. Before wading back into the market, investors need to see evidence that the money markets have thawed and banks are making loans again. “Once there is no need to price in some chance of an all-out banking collapse, equities should be able to rise.” Until then, the sidelines are the only safe place to be.