When all of the cards are on the table, the game plays itself. For the last several weeks, all of the negative cards have been on the table -- in full view of everyone. By this time, the stock markets know the limiting case of an extreme negative outcome and have priced this case into current valuations. We know the following:
(1) The various actions by the Fed and the Congress (i.e., monetary easing, the stimulus package and the TARP) have not brought the desired level of economic growth, but they have stabilized the economy. Unlike the Great Depression, balancing the budget has properly taken a back seat, in the short term, to preventing a collapse of the financial system.
(2) Some European banks and countries face financial collapse unless a coordinated action is taken similar to that of the U.S. Everyone knows this and no one wants this -- not Europe or Asia or (fill in the blank). Action must and will be taken to address these problems.
(3) Mattresses, refrigerator freezers, and corporate balance sheets everywhere are awash in cash. Sooner or later (most likely sooner), greed will overwhelm fear and investment will occur -- with or without action by Washington. Even the Tea Party cannot hold progress at bay for much longer.
(4) Households are reducing debt and saving a much higher levels than at any time over the past several years. Very soon, people will wake up one day with a desire to consume again and will discover that they can afford it.
(5) Bin Laden is gone; anti-terror activities have been effective. Soon people will decide to live again rather than cowering in fear. Americans will not forget what happened on 9/11 but will not let that event rule their futures.
(6) Politics is boring and for the last few months, politicians have been silly. Soon Americans will relegate our political sideshow to a place that fits its irrelevance.
(7) We are in a historically awful time for stock prices. Oh, wait! Everybody knows that and has been anticipating it for months.
Since the extreme negative case has been priced into stock valuations, the overwhelming odds favor significantly higher stock prices in the near future. What will improve our economy and the financial system is the passage of time and the growth of awareness that the future is bright. Whatever the outcome of political battles, time will soon transcend the barriers that the markets face.
Whereas the greatest sin in investing has long been to catch a falling knife, in the future, the greatest mistake will have been to hold cash and "wait until the economy is better." Time to beat the rush back into stocks. Broad-based ETFs, like SPY and VXF will work just fine.