Pop Goes the Stock Market, Again

On Oct. 16, this article was published on our sister site, fool.co.uk -- and provided an interesting take on the week in stocks. We thought you'd like to read it. The article has been updated and Americanized by Todd Wenning.

The stock market rally lasted all of two days. What went wrong? The banks might be saved, but China has stopped growing, the resources bubble has popped, and that recession just got a little closer. What now?

What a difference a day makes.

On Wednesday, here I was, thinking all is relatively calm on world stock markets. The "Brown Solution" of government injections of capital into banks in return for equity stakes looked to have broken the back of the credit crisis.

Then, boom. The FTSE 100 index fell more than 7%, or 315 points, its fifth-biggest percentage fall in history. Then the Dow Jones Industrial Average was savaged for a nearly 8% fall, the 733-point loss being its second-biggest point drop ever, behind only the record decline on Sept. 29.

The first shoe to drop was that of mining giant Rio Tinto (NYSE:RTP). On Wednesday, the company deferred the divestment of $10 billion in assets, probably because (a) there weren't any buyers willing and able to buy them, and (b) even if there were buyers out there, they wouldn't have been willing to pay full value for the assets.

Shock of all shocks -- China has stopped growing
But the main insect in the Rio ointment was China. Rio CEO Tom Albanese said: "In the near term, the Chinese economy is pausing for breath. ... Furthermore, we expect third-quarter economic data to show an exaggerated slowdown reflecting the postponement of projects during the Olympics."

There's that old Olympic Games hangover in action again. I'm not sure how Athens is coping following the 2004 Olympics, but I do know to this day Sydney is still struggling to regain its pre-2000 Olympics glory. Watch out, London, come 2013.

Well before Rio's admission of guilt, the mining bubble was already deflating. Commodity prices were plummeting. Energy prices were also in free fall, the most notable being oil, down from $147 a barrel to $75, a nearly 50% fall in just the past few months.

Pop goes the resources bubble
Did Rio's statement finally kill the resources boom, once and for all?

The market certainly thought so. Take a look at the price action of these mining stocks on Wednesday ...

Data: Yahoo! Finance. In U.S. dollars.

Ouch, ouch, and triple ouch.

Rio's CEO did try to put some gloss on the Chinese story, and the company's own prospects, by saying: "The long-term outlook for Rio Tinto remains positive. ... Looking further out, Chinese GDP will remain largely driven by the domestic economy, and we expect industrialization and urbanization to continue apace."

Phew. It's all OK, then.

I can't see past the end of my foot
Here at The Motley Fool, we've always encouraged investors to take a long-term approach to investing in the stock market. But in practice, that's not easy to do.

When you see your portfolio shrinking on a daily basis, often by significant sums, it's tempting to sell out, to end the pain, to preserve whatever value you have left.

When you see a huge company like Rio Tinto say Chinese growth has effectively stopped, and you see its share price plummet, the temptation is to sell out, despite Rio's remaining positive about Chinese growth over the long term.

Will China continue on its great industrialization and urbanization revolution? Or, instead of moving to large cities, will millions of Chinese people pledge to stay in their rural paddy fields, as they have done for centuries?

Right now, it's tough to see past the end of your own foot. These are uncharted waters, both economically and financially. The recession is here. It will be deep. It will probably be long.

But there is a solution ...

How you can help stop the recession
I have the perfect solution -- spend, spend, spend, and fast. There are plenty of bargains out there right now as desperate retailers try to lure shoppers to spend. Load up your credit cards. Load up the car. Buy that new plasma TV -- it's on special now. Buy that new stereo system. New kitchen? Make sure you get top-of-the-line appliances.

If we all get out there and spend, there will be no recession. Share prices will go up. House prices will stop falling and might even start rising again. Interest rates might rise a little, but for people with savings, that will be a good thing.

Oh.

I've just realized that's the type of behavior that got us into this mess in the first place.

Oh, well.

We'll just have to go back to living within our financial means again. How utterly boring. But how utterly essential.

You don't say, Mr. Bernanke
I've been saying for, oh, at least a week that a recession was coming and that its prospect was the next phase in the great bear stock market of 2008.

It well and truly reared its ugly head on Wall Street overnight. It shouldn't have been a shock, but for some reason -- probably fear, nervousness, and panic -- it was.

According to Bloomberg, Federal Reserve Chairman Ben Bernanke told the Economic Club of New York that government efforts to calm financial markets and stem the credit crisis probably won't result in an immediate economic rebound.

You don't say.

I don't know about you, but I've been battening down the hatches in the past few weeks. I've curtailed spending on non-essential goods and services. I've postponed home improvements. This sort of behavior will be happening across the Western world. No wonder the great exporter, China, has seen its post-Olympics growth stop -- everything I used to buy said "Made in China."

Let the good times roll
Stock markets remain fearful. I can't predict the short-term future. I don't know how long we are going to be in recession. I don't know how far unemployment will rise.

But I do know recessions end. I also know share prices start rising again before recessions end. I know there is hope among the despair of falling stock markets, falling pension values, and impending recession.

Your personal goal, should you wish to accept it, is to financially get through the next six to18 months as best you can. The good times will come again.

Bruce Jackson owns shares of BHP Billiton. Todd Wenning owns no shares of any company mentioned. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy is trans-Atlantic.