For years, the stock market has worked in slow motion. Rallies, corrections and sector rotation all proceeded slowly. That ended with relentless speed in September, October and November of 2008. In a few weeks, the market did what might have taken a year or two in earlier times.

If you feel stunned, you are not alone. Even bears expected nothing like what has happened in the markets, both in terms of its speed and its comprehensive sweep.

And the crash is not yet finished. Although some brave voices say stocks reached a bottom in November, the rapid deterioration of business worldwide, the collapse of commodities prices and the continuing credit crisis are clear signals that the market has more bad news to discount.

Daily volatility of the markets has been wild. Until that settles down, assessing the investment scene is just about impossible. Panic and fear will recede as markets become less volatile.

The current downturn will be long-lasting because the economy and markets had overreached themselves. Until recently, stock prices and corporate earnings were soaring far above their long-term trends (see accompanying charts). These trends are the product of least-squares statistical analysis. As we know, markets move toward the mean after periods of excess above or below the trend.

Rates of change in gross domestic product have for years been indicating slower growth. But after the negative low of 1990-91, there was ongoing growth. At the 1999-2000 peak, the 12-month rate of gain in GDP ranged as high as 6.7%. Since then, growth has been weaker in the rallies. The recent trend suggests a drop in GDP before long.

Yet, despite the more recent slowing of GDP growth rates, corporate earnings had grown higher and higher. In 2006, Canadian after-tax corporate profits reached a peak of $149 billion. At that point, they were 57% above their post-1970 growth trend.

In 2007, corporate profits fell to $141 billion, 44% above the trend. That grew to $162 billion in the four quarters ended Sept. 30, 2008.

As economic growth weaves above and below long-term trends, the next move is downward. In 1992, corporate profits were 80% below that trend, illustrating the degree to which earnings can change.

The same excess had occurred in the stock market. The S&P/TSX composite index closed 2007 at 13833, or 41% above its trend since 1970. (It was 124% above its 88-year trend.) With the index down as low as 8155 in November 2008, stock prices now are clearly below the trend. They can go well below that; in 1992, for example, the market closed at 39% below the trend.

In sum, these analyses emphasize that our current problems are long-term. But they can’t tell us what investment decisions to make now. The questions are really fundamental: whether to sell now or invest. If the answer is to invest, then in what?

A clear reduction in market volatility is probably the best indication we can get that this market plunge has been exhausted. But this, in itself, will not indicate that a major market low has been reached.

The relatively less volatile markets in early December 2008 suggest we could be reaching the point of making strategic decisions. Here are some issues worth considering:

> Are Stocks A Bargain Now? Some undoubtedly are, but identifying them when daily market moves are so great is a tough task.

In Canada, the price/earnings multiple on the S&P/TSX composite index has dropped to 10 — a highly appealing valuation. But earnings are dropping and the multiple will go lower.

Dividend yields are also improving, with the S&P/TSX composite now producing a 4.6% return. The business slowdown could put payment rates at risk.

For the first time in decades, though, yields are starting to match bond yields. In the U.S., the yield on the S&P 500 composite index has risen to 3%, in the same range as 10-year U.S. Treasury bonds.

> Is The Energy Boom Over? After a six-month drop of 80% in oil prices, the commodities bull market looks dead. The drop in the Commodity Research Bureau futures index to levels reached in 1999 and 2002 reflects this. Long-term supply and demand trends, however, indicate the depression of oil prices will not last long.

Over a three-year span, the S&P/TSX energy sector subindex has one of the weaker performance rankings. This suggests energy stocks are becoming a good long-term prospect. That is a brighter outlook than for industrial metals.

@page_break@> Inflation Or Deflation? With central banks flinging billions and trillions at banks in their attempt to halt the credit crisis, higher inflation looks inevitable. But low long-term government bond yields indicate the opposite.

Perhaps even the greatly expanded money supply cannot stimulate demand in a severe worldwide recession. For the present, deflation seems the most likely outcome.

There is, of course, a great contrast in bond yields. Corporate bond yields and high-return bond yields have jumped because of increased business risk. (See page 29.)

Keep in mind the secular cycle in interest rates, which peaked in 1981, and U.S. Treasury issues yields, which are reaching levels at which past secular declines ended. IE