Yet despite all the gloom and doom, Wall Street barreled ahead, helped by a share buyback from IBM and a rebound among home builders on speculation that the housing market has hit bottom.
Comments from Fed Vice Chairman Donald Kohn that inflation was less of a worry than the slowing economyalso reassured investors that the Fed was likely to keep cutting interest rates.
While some viewed Tuesday's gains as simply a short-term rally in a bear market, investment pros say you should look for times like these as an opportunity to grab some high quality and undervalued stocks.
"There are some buying opportunities if we make it through the next couple of months," Peter Costa, market analyst at Eckhart, said on CNBC. "Once we get through this there will be a time for the market to rally again, so I am turning a little more optimistic."
Large food companies, producers of consumer staples like alcohol and tobacco, and yield-paying large caps are favorite spots for money managers in times of fear.
"You've got to find companies with real earnings," says Dave Rovelli, managing director of equities trading at Boston-based Canaccord Adams. "You migrate to large caps, safer stocks like Heinz or Proctor & Gamble.
The January surge in producer prices reignited fears of stagflation--the combination of negative economic growth and rising inflation. But analysts point out that there's very little resemblance to what the U.S. economy experienced in the 1970s and 1980s.
"Everybody's talking about the 70s, but that was a supply-driven inflation driven by restrictions on oil," says Douglas Roberts, of Channel Capital Research. "Capacity in Iran went offline as a result of the Iranian revolution. These situations so far have not occurred today."
And in the present day, consumers continue to pursue essentially normal buying habits and the stock market lately has been shrugging off bad news that had been sending it into a tailspin.
"People lose sight of the fact that this is psychology," said Quincy Krosby, chief investment strategist at The Hartford. "The ultimate psychology is when you see people starting to horde. "When you see people buying chickens and stuffing them into their freezer because they're afraid that the chickens are going to be more expensive the next time they go to the market, that is the ultimate manifestation."
A Time to Buy
Still, it's undeniable that economic growth has at least slowed, and the CPI and PPI numbers are hard to dispute that even core prices, which strip out volatile food and energy prices, are rising.
Investors have reacted to the danger signs in a number of ways. Some have placed long-term bets on the more reliable Wall Street stalwarts, while others have moved to the safety of government bonds.
Spherion executive Rob Morgan said Tuesday's surge at International Business Machines, which announced a share buyback and raised its outlook, sending stocks sharply higher, is an example of the kind of safe play needed in shaky economic times.
Commodities, particularly oil, grains and metals like platinum and gold, have drawn intense investor attention despite their risk. Money mangers, though, generally are discouraging such moves for all but the most sophisticated investors.
"We have a much more vibrant market in the commodities," Krosby says. "Commodities have become an asset class in themselves. Because of that, you've got quite a bit of speculation pushing up market prices."
The agricultural commodities are proving to be an especially enticing play, with wheat gaining nearly 25 percent on Monday alone.
"The commodities play is the big one. I don't think it's over yet," says Steve Sachs, director of trading at Rockville-Md.-based Rydex Investments. "You see a lot of talk in the street about how long in the tooth this commodities bull market is, but with the Fed cutting rates as aggressively as they are and they're going to inflate another bubble. That's what happens when you cut rates."
For equities investors, Krosby counsels companies that are capitalizing on consumer demand and dollar weakness, particularly health care and consumer staples.
Altria had been a strong performer in the tobacco sector, but recently was removed from the Dow Jones Industrial Average blue chip index. Reynolds American also historically has been a fairly steady dividend-paying stock, though it is 11 percent off its 52-week high. Analysts now are advising bargain hunting in an oversold market.
"You want companies that are selling overseas to companies that are still buying. The weaker dollar is still a strong element in these sales," Krosby says. "As long as global demand remains intact, you're going to see these companies do well."
Kresh is pushing his clients away from cash, after heavily increasing his position over the past 18 months, and back into equities.
"The more people are afraid, the better the opportunities are," he says. "I'm much more concerned when people are ecstatic and happy and think the world is perfect. ... The best time to buy is when there's blood in the streets."