After the Carnage: Bargains and Opportunities in 2009

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Some examples: With oil prices less than one-third their July peak, the energy sector is ripe for an eventual rebound. Arcelor-Mittal, the world's largest steelmaker, has a stock price that's only twice its annual earnings per share. That sounds like a rare bargain unless you think the world has all the steel it'll ever need. Turkey and Brazil are fundamentally strong countries that have been whacked by the markets.

In the U.S., look closely at corporate bonds, which offer a record yield premium over Treasuries. In junk bonds, better your odds of success by focusing on the debt of recession-resistant industries such as—no kidding—prison management. Or take a look at some lesser-known debt instruments. Securitized bank loans, for example, are safer than bonds because they get paid back earlier in the event of a bankruptcy.

There are probably fewer bargains in the stock market than in the corporate bond market simply because stocks haven't been beaten all the way to the floor yet. But stocks are still way more attractive than Treasuries. For the first time since 1957, the dividend yield on the Standard & Poor's 500-stock index (3.3%) exceeds the interest yield on 10-year Treasuries (2.2%). That means that even if you make zero in capital gains, you can still make more money in stocks than in government bonds.

In keeping with the theme that the U.S. needs to step up production and cut back its consumption, think about investment opportunities in infrastructure and green technology. Those also happen to be priorities of the incoming Obama Administration. The stories on those sectors that follow tell you which stocks make sense and which don't. If you want to go with the tried and true, seek out "comfort stocks"—companies like Schering-Plough (SGP), Hewlett-Packard (HPQ), and Coca-Cola (KO) that should ride out the recession better than most.

To be clear, none of these picks is a sure bet over the short term. If all you care about is preserving capital, keep your money in an FDIC-insured bank account. Or go for a money-market mutual fund that stashes all its assets in Treasuries. But even that won't protect all your capital. Short-term Treasury yields are so low now that after you subtract management fees, money-market yields are turning negative.

A SAVINGS RENAISSANCE

Every recession is unhappy in its own way, and it's impossible to say how this one will unfold. The most frightening possibility is that we'll get all the pain with none of the gain. After the recession, the global economy could still be unbalanced, and the U.S. may well continue to depend on the kindness of strangers to finance its trade deficit. There are worrisome signs of that. The world's investors are still pouring money into Treasuries. Despite the dollar's recent tumble, it remains above where it was when the crisis deepened in September. A strong dollar could delay the needed rebalancing by making U.S. goods expensive and foreign goods cheap in world markets.

On a more hopeful note, Americans are starting to save again rather than relying on capital gains to do their saving for them. The government says Americans set aside $260 billion from their disposable incomes in October, up from about $70 billion a year earlier. That's a step in the right direction for the long term, even though it intensifies the short-term downward pressure on the economy because consumers aren't spending.

Take comfort from this fact: However much worse things get, we're closer to the bottom than we were in October 2007, when the Dow Jones industrial average was over 14,000. That was the time to bail, not now that the market is 40% off its peak. And at some point, even if the economy continues to deteriorate, investors and consumers will get sick of being in a defensive crouch and start spending again. Heck, people kept frequenting the outdoor cafés of Beirut in the middle of a civil war. "Thankfully, people and markets have an uncanny ability to become numb to bad news," writes Scott Anderson of Wells Fargo Economics (WFC). It's when they adapt that the economy and the markets begin to rebound.

It's hard not to get drawn into the game of trying to pinpoint the very bottom of the market. Jim McCaughan, chief executive of Principal Global Investors, the $200 billion-plus asset management arm of Principal Financial Group (PFG), says: "We could be as little as six months from something where you could put hand on heart and say it's a reasonable upturn." He says it's "very possible" that the S&P's drop to 752 in mid-November could prove to be its low for this cycle. (It closed at 880 on Dec. 12.) Having a good chunk of your money in the market ensures you won't miss the inevitable rebound. Just be prepared to wait a while.

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Coy is BusinessWeek's Economics editor.