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Welcome back, panic! After a few days off, it's back: The Dow fell more than 500 points this morning, and 10-year Treasury rates hit an all-time low below 2%. (On that note, if you're one of those willing to lend money to the government for a decade at less than 2%, shoot me an email. We need to talk.)

What's driving the sell-off?

Standard caveat: Who knows. Markets do crazy things. More than 60% of total volume is done by high-frequency computer trading operating off of brainless algorithms.

But a few things stick out.

The past two weeks have understandably shaken confidence. Mutual fund outflows last week hit levels not seen since late 2008 -- although ETF inflows likely offset those figures. Fund giant Fidelity says its customer call volume spiked 50% last week. TD AMERITRADE (Nasdaq: AMTD  ) says it processed more than 900,000 trades last Monday, with four out of five days last week hitting record levels of trading activity. Many were buying. But if the market is any guide, plenty were panicking.

Panicking over what? The worry du jour is that we're heading into a new recession. This morning, the Philadelphia Federal Reserve released a gauge of manufacturing activity, now at its lowest level since March 2009:

Source: Philadelphia Fed.

Does this guarantee a recession? No. But it's unmistakable that the economy has slowed in recent months.

Still, don't let any of this push you into panic. As my colleague Todd Wenning said this morning, "Some might see a Bloomberg machine flashing red as a 'panic' sign, but Fools should see it as a 'For Sale' sign."

It can't be repeated enough: The best returns are made during the darkest days. If you wait for the economy to get better, or for markets to "calm down," you'll miss the biggest returns. It's always worked that way. This too will pass, and those with a patient, long-term outlook will win. On the bright side, we're 500 points closer to the bottom than we were yesterday.

What do you think about these wild market days? Sound off below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (22) | Recommend This Article (38)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 18, 2011, at 11:53 AM, OutperformOrDie wrote:

    Bang up job as usual, Morgan.

    I love these times! Adding to my holdings and reinvesting my dividends feels so much sweeter after a 500 point decline.

    Fool on, buddy.

  • Report this Comment On August 18, 2011, at 12:05 PM, rhutmacher wrote:

    "On the bright side, we're 500 points closer to the bottom than we were yesterday."

    That point of view is the reason I read all of your articles

  • Report this Comment On August 18, 2011, at 12:06 PM, fool403 wrote:

    It seems similar to 2008. I sold some equities today. I had just bought them recently after I sold all of them earlier this month. I'm uncomfortable with the huge market swings.

  • Report this Comment On August 18, 2011, at 1:17 PM, DonkeyJunk wrote:

    Those who believe the economy is not doomed to irrecoverable destruction, and don't need their money any time soon, are riding this out or doubling down. Count me in.

  • Report this Comment On August 18, 2011, at 1:19 PM, jordanwi wrote:

    I had to read your opening paragraph to my colleague in a fit of hysterical laughter. Too good. I'll be looking for sales, and getting rich as hell.

  • Report this Comment On August 18, 2011, at 1:22 PM, KommanderKhaos wrote:

    Not too worried about it. I agree 100% with your take, Morgan as well as OutperformOrDie's. If this type of thing induces panic in anyone, then they're probably not cut out to be investing in the stock market anyway- and I don't mean that in a negative way or as a slur either, just as a practical reality, because this is simply how the stock market works sometimes. So if it makes you crazy with worry or fear, then maybe you shouldn't be invested, because life's too short to waste any time in needless panic or fear.

    To me it can be slightly discomforting to see huge down days when I take a look at my portfolio and see the paper losses I've incurred within the course of a very short time, but then I always remind myself to look at the larger picture, and how the compounding of my reinvesting dividends will increase all the more with these downward movements, and that I have cash available to add some more quality companies on sale where and when I see fit to do so. So rather than panic, I see opportunity.

    That's part of my continuing and continual evolution as an investor and has been learned through hard lessons, because there was a time when I was younger where I *would* panic in times like these and be overcome by fear and maybe even feel an irresistible compulsion to hit that 'Sell' button at the worst possible time, because I was all-in and could see my portfolio looking destroyed before my eyes, and I was kind of an emotional basket-case like that when it came to investing, and that's no way to be obviously, because that's when you tend to make some very bad decisions- and I did, plenty of them.

    Now I've learned to divorce myself emotionally from the day to day swings whether up or down, see times like these as filled with great opportunity rather than great fear, and always have cash on hand to take advantage when the markets are filled with fear and are overreacting irrationally as a result of that.

  • Report this Comment On August 18, 2011, at 1:36 PM, RaulChapin wrote:

    This sell off is very tempting, however as I am already 100% in stocks at the time (minus my emergency fund which is in a CD ladder) I am left salivating over the opportunity.

    I am tempted to move half my emergency fund into stocks, and rebuild it over the next 6 months...

    Then again, market timing is said to be a bad thing, wether on the way down or up...

  • Report this Comment On August 18, 2011, at 2:04 PM, sgt1917 wrote:

    I am 1/3 invested but I'm thinking we've yet to see the bottom. Things are really getting bad in the economic world, worldwide. I don't see things getting better for anyone until after we get a Republican (a real one, not a RINO) back in the White House.

  • Report this Comment On August 18, 2011, at 2:31 PM, MMTInvestor wrote:

    "It can't be repeated enough: The best returns are made during the darkest days."

    True enough. But what makes you think we're in the "darkest days"? The market has barely priced in slow, non-3% GDP, let alone an actual global recession, which is fast becoming a near certainty, IMHO. Fwd operating earnings estimates are still WAY too high.

  • Report this Comment On August 18, 2011, at 2:47 PM, wolfman225 wrote:

    I agree with the above comments. As a small investor who has followed the "rule" of never investing money I'm likely to need in the next 3-5yrs I'm not too shook yet. I first started my 401K in June 2001, between the dot-com bust and the attacks of 9/11. I stayed in and DCA'd my way to significant gains over the following years. I'm doing the same now, expecting the contributions I make to build up a large base to grow from during the eventual upturn.

  • Report this Comment On August 18, 2011, at 3:10 PM, SammyP1 wrote:

    sgt1917 - Give me a break. How's austerity and conservatism working out in the UK? This worldwide recession is bigger than political ideology, it's a once in a generation breakdown of the global financial system and it is going to take a long time to recover, regardless of who is in power. But I'm sure that whoever happens to be in power when things finally recover will rush to take full credit for it all.

  • Report this Comment On August 18, 2011, at 3:27 PM, cn01 wrote:

    I am finally convinced that the stock market is no place to be. The crash of 2008 was a dark nd stressful time for me but I stuck it out and was happy to see the markets go up again. A repeat performance, however, is probably more dangerous to my health than smoking two packs a day. I sold most of my assets two weeks ago but kept Apple, Coca Cola, Pepsi and a few others. Now I'm waiting for an opportunity to sell even those. Never again!

  • Report this Comment On August 18, 2011, at 3:31 PM, lewellen180 wrote:

    Couple of things....

    Trading algorithms aren't brainless ... but they are thoughtless, and without imagination nor understanding. Subtle but important distinction - they don't know when to stop doing what they do unless someone tells them to.

    Re cashing in the emergency fund to buy stocks - please don't. That's not what it's for.

    One way to deal with markets like this is to realize that when you buy a stock, you're spending money. You can't spend 100 shares of AT&T any more than you can spend a new coffee mug, or a lawnmower. All of these things might have some value ... but you have to sell them first to get at it.

    The point is that buying stocks is spending money at the time you buy the stock. Don't spend more than you earn, or need, and it's not going to be a short-term problem if the value of what you bought goes down. Irritating, yes; annoying, highly; problematic, no. Exactly this happens when you buy a new car, right?

    It's not a perfect panacea, but I find it to be a good reminder in times like these.

    Re darkest days or not (yet) ... I honestly don't care. I don't spend more money on stocks than I can afford to lose, and I dollar-cost average.

    Re once-in-a-generational breaks - see above paragraph. Assuming there is an end to the sturm und drang, I'm going to be happy I DCA'd through it.

    Assuming there's not an end to it, then having a pile of worthless dollars is going to be the least of my worries. :-)

  • Report this Comment On August 18, 2011, at 4:39 PM, Rockfish88 wrote:

    I have to believe that when I selected the companies I own, that I read the write-ups and followed the posts on the companies in sufficient detail to have assured that the overwhelming majority of them are good companies that in the long run will prosper and grow. Added 350 IPGP today. It might get cheaper, but so what? In the long run it will be worth lots more than it is today, I feel confident about that with almost all of my holdings. I'm long AAPL, ISRG, AMZN, PCP, MSM, CMG, MORN, ATVI, F, COST, KO, JNJ, CNI, and a number more. I am convinced that the only thing that can make these into bad investments is impatience.

  • Report this Comment On August 18, 2011, at 5:41 PM, xetn wrote:

    This is not just the US economy that is the problem. It is also Europe. Not only are all these economies weak (now including Germany) but all seem to be losing ground in employment. This feels much more like a depression on a world-wide scale.

  • Report this Comment On August 18, 2011, at 10:14 PM, cmfhousel wrote:

    ^ Yes, but were the buyers mom-and-pop retail buyers from Ameritrade? I doubt it.

  • Report this Comment On August 18, 2011, at 10:49 PM, richie54 wrote:

    The Oracle of Omaha was interviewed last week. He said "I'm buying." In other words, it's time to get greedy, just like March/April 2009. Good luck and good returns for everyone.

  • Report this Comment On August 19, 2011, at 1:42 AM, dgmennie wrote:

    Here is the key fact in this article everyone of investment age should be pondering: "More than 60% of total [trading] volume is done by high-frequency computer trading operating off of brainless algorithms." Yes, the algorithms have taken over and they are not there to assist the small independent investor. In fact, the time is fast approaching when there will be no significant number of small investors left in the game, and "trading" will simply be an endless contest between major players using competing algorithms that seek to preserve value and avoid risk (thus generating even more risk than would otherwise exist without programmed trading). In such a scenario, the markets will often swing wildly up and down, inspired by who-knows-what rumor/newsbite du jour, haunted by the very real debt crisis that everyone can now see as a worldwide problem (e.g., no place to hide). You really think the average person's IRA or brokerage account can survive (or grow) long-term in this environment? The hard truth is that the non-professionals serve only as much-needed fodder for the very few "experts" who still know how to clean a clock. And many of THEM are now running scared!

  • Report this Comment On August 19, 2011, at 10:01 PM, Kiffit wrote:

    If you read back in the early 70's a fictional book called 'The Crash of 79', the author lays out a scenario that looks pretty similar to what is happening now. At the end, having anticipated the economic denouement, (as you do) he buys a pile of gold and retires to a ranch in California, as civilized life starts crumbling around him. Ho Hum.

  • Report this Comment On August 20, 2011, at 5:07 AM, thidmark wrote:

    "You really think the average person's IRA or brokerage account can survive (or grow) long-term in this environment?"


  • Report this Comment On August 23, 2011, at 1:56 AM, krazycanuck wrote:

    When shoes are on sale, we like to buy. When cars are on sale we like to buy. When food is on sale, we like to buy. When stocks are on sale...?

    Many like to SELL!

    I prefer to BUY BUY BUY!!!

  • Report this Comment On August 23, 2011, at 2:03 AM, krazycanuck wrote:

    Addendum to above:

    When there is blood in the streets, I like to go out with a mop and mop up...

    When there is euphoria in the streets, I like to hunker down and get ready for a riot!

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