"Fear" and "panic" were the watchwords of 2008 and the beginning of 2009, and investors were scrambling to try to stem the massive bleeding in their portfolios as everything from MGM Mirage (NYSE:MGM) to Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) tumbled. In March, though, green lights started flashing and the market went charging ahead, scoring a 60%-plus gain by mid-October.

All of that must have been pretty tiring, though, because we've barely budged from that October high.

This may be exactly the wrong time to fall asleep. Though the gnashing of teeth over the debacle in Dubai seems to have quickly faded, the woes in that desert country may foreshadow bigger problems still facing the worldwide financial system.

To get some insight on whether investors should be getting even more vigilant right now, I turned to the investment team at the Motley Fool Hidden Gems newsletter.

So, fellas, does the situation in Dubai spell trouble for the broader world economy, or was this just a one-off blunder?

Jeremy Myers, analyst
It's amazing how a few months of spectacular gains can wipe out investors' collective memory. What surprised me most about the Dubai World announcement was that everyone was so shocked. As Dubai developers were building the biggest and best of everything, they likely weren't expecting a worldwide recession and credit crisis right around the corner.

In the words of Jimi Hendrix, "castles made of sand melt into the sea, eventually." I think that Dubai is a great reminder that there are still plenty of risks out there, whether you look at commercial real estate, lingering unemployment, high mortgage defaults, or hyperinflation (or deflation, who knows?).

Andy Cross, co-advisor Hidden Gems
Risk, perhaps the most debated concept in investing, is really in the eye of the beholder. What I dub as "risky" -- meaning I think we'll lose money on it -- Joe-Momentum-Trader-Guy may not blink at.

If you're a stock investor like us then risk comes with the territory. And we have to remember that there are no guarantees, as we learned last year when even blue-chip stalwarts like General Electric (NYSE:GE) and Dell (NASDAQ:DELL) got smoked by more than 50%. And even though recent economic news has been encouraging (this Dubai mess aside) we're not finished treading water.

Seth Jayson, co-advisor Hidden Gems
As I posted on the Hidden Gems discussion boards, the billions at risk here are nothin', nada, zilch -- it's piker's pay compared to the hundreds of billions in commercial real estate losses that U.S. banks are probably going to be taking over the next few years. But Dubai gets the headlines while bad banks are apparently passe, so, once again, investors are focusing on the wrong thing.

What investors should think about is all that ridiculous commercial real estate that was built in Dubai, and how the billions in losses on our shores come from a less flashy, but no less bubblistic, recent past. There will be economic fallout from both situations, but the important thing for investors to figure out is, what's their exposure to the likely risks?

There's a much bigger chance that U.S. equity investors stand to lose something, directly or indirectly, from billions in commercial real estate loans gone bad than there is they'll be pinched by any direct fallout from Dubai's nonsensical palm-shaped islands.

It sounds like the clouds may not have parted quite yet. In the face of all of this, are there specific stocks or sectors that investors should be looking toward, or avoiding?

Jeremy Myers
The rally that we've seen has been widely labeled a "junk rally," with the riskiest assets far outpacing many of the better businesses. That said, I'm not about to pretend that I know anything more about where this market is going than the next guy.

What I am doing is continuing to look for well-run businesses, with strong competitive advantages, great returns on capital, and conservative balance sheets -- companies like Neutral Tandem (NASDAQ:TNDM) or Chipotle (NYSE:CMG). These are the companies that are going to be able to take advantage of a rough economy and more bad news to grow their business and take market share from weaker competitors. 

Andy Cross
I'm still doing what I've always done -- looking for the best companies selling at the best prices once I bake in a variety of good and bad scenarios.

Two companies that come close to fitting this bill are Neogen and Ampco-Pittsburgh, which I put on our Hidden Gems Watch List in October. These two small-cap companies are big-time players in their specific markets and have exciting long-term tailwinds -- food-safety testing for Neogen and steel usage for Ampco. I'm not ready to make them official Hidden Gems companies today, but I'm keeping a close eye on them.

Seth Jayson
For small-cap investors interested in market generalizations, it's helpful to focus a little bit and take a look at how small-cap sectors have performed during 2009.

Sector*

Year-to-Date Returns

Energy

49.9%

Consumer Discretionary

38.5%

Information Technology

37.2%

Materials

33.9%

Consumer Staples

22.6%

Health Care

13.7%

Industrials

9.2%

Utilities

(2.6%)

Financials

(13.1%)

Telecom

(47.3%)

Source: Standard & Poor's.
*Sector performance from the S&P SmallCap 600.

Small-cap financials -- including banks likely to be pinched by those lousy commercial real estate loans -- are the second-poorest performing sector in all of small caps. I'd usually like to be more optimistic about finding real Hidden Gems in a beaten-up sector like that, but absent being employed in a small-cap bank's lending department, it's all but impossible to quantify the risks that any individual bank has taken on. We're taking a closer look at the sector, but identifying winners here will be harder than perhaps any other small-cap sector.

You can check out exactly what the Hidden Gems team is betting on in this market by taking a free 30-day trial.