A trader signals an offer on Standard & Poor’s 500 index options at the Chicago Board Options Exchange. The S&P 500 is down 16.7% since it peaked for the year April 29 and is down 9.6% year to date. (Scott Olson, Getty Images / September 24, 2011)

By Tom Petruno Market Beat
September 24, 2011

Investors know they’re supposed to look for opportunities in financial markets when things seem bleakest. But that’s the incredibly difficult challenge right now — how to judge where we are on the Bleak-O-Meter.

The onslaught of grim news suggests the world is deep in the red zone, a la the 2008 economic meltdown. How many more times do you figure you’ll read these headlines: “Markets dive on recession fears” … “European debt crisis worsens” … “No end in sight for jobless woes.”

Shades of 2008? Yes. Except that on car dealers’ lots across the country, business is brisk, according to J.D. Power & Associates. The firm is projecting an annual U.S. sales rate of 12.9 million vehicles this month, the best pace since April.

True, that reflects pent-up demand after the supply interruptions following Japan’s devastating earthquake in March. But the strength of sales belies the idea that a consumer recession is already here.

Maybe this month’s car shoppers are the people who have been smart enough to load up on high-quality bonds. If your 401(k) was entirely in the Vanguard Total Bond Market Index fund, which owns investment-grade government, corporate and mortgage bonds, your balance would be up 7% this year, while the Dow Jones industrial average is down almost 7%.

The Federal Reserve this week further rewarded the millions of Americans who have shunned stocks in favor of bonds since the 2008-09 market crash. The central bank announced Wednesday that it would try to pull longer-term interest rates down by shifting a chunk of its massive Treasury bond portfolio from shorter-term securities to longer-term ones over the next nine months.

Investors and traders were quick with the math: If the Fed will be shoveling cash into longer-term Treasuries, the prices of the bonds are likely to rise, sending interest rates down. Better to lock in now — which is exactly what people did on Wednesday and Thursday.

The annualized yield on the 10-year Treasury note, a benchmark for mortgage rates, dived to a 60-year low of 1.72% on Thursday. On Friday the market was hit by some profit-taking, lifting the yield to 1.83%. But that still was down sharply from 2.05% a week ago and 2.80% eight weeks ago.

The Fed was trying to show it hasn’t run out of ideas to support the economy. We know by now that lower long-term interest rates aren’t a panacea, but they’ll help some number of homeowners save money by refinancing their mortgages. Maybe they’ll buy cars with the extra cash they’ll have in their pockets.

Yet even as the Fed threw the bond market a bone, it pushed the needle on the Bleak-O-Meter further to the right by warning that the economy faced “significant downside risks.”

That helped trigger another dive in stock prices worldwide. The Dow plummeted 283 points Wednesday and 391 points Thursday. Stocks stabilized Friday, with the Dow inching up 37.65 points to 10,771.48. But the loss for the week was 6.4%, the biggest one-week decline since October 2008, when the financial system was coming unhinged.

Still, the U.S. market’s slump from its spring highs isn’t on the scale of what happened in the fall of 2008 — not yet, anyway. The Standard & Poor’s 500 index is down 16.7% since it peaked for the year April 29 and is down 9.6% year to date. By contrast, the S&P had plunged 30% in the collapse of September-through-November 2008.

Wall Street has been surprisingly resilient, particularly compared with what has happened in Europe. As the continent’s government debt crisis has worsened, European bourses have fallen into deep new bear markets. The Italian market now is down 32% year to date, the French market has fallen 26% and German shares are down 25%.

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