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Economy

A Brutal Week For Investors; Will There Be More Zigs Than Zags?

Traders work on the floor of the New York Stock Exchange on Friday. The Dow Jones industrial average dropped 531 points, or more than 3 percent. Spencer Platt/Getty Images hide caption

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Spencer Platt/Getty Images

Traders work on the floor of the New York Stock Exchange on Friday. The Dow Jones industrial average dropped 531 points, or more than 3 percent.

Spencer Platt/Getty Images

Wow. That was ugly.

For investors, a brutal week ended Friday with prices plunging for stocks and commodities. The Dow Jones industrial average fell 531 to 16,460, a 3.12 percent drop.

Oil's tumble was especially notable. For a while, West Texas crude was trading below $40 a barrel — the first time that happened since March 2009. It finished at $40.45, marking an eight-week stretch of price declines — the longest losing streak since 1986.

Want to play it safe and just earn interest on your savings? Sorry. The yield on a 10-year Treasury note also fell, down to just 2.05 percent, the lowest level since April.

So what's an investor supposed to do?

Experts are mixed about the outlook. Some say not to worry too much: This downturn was an inevitable "correction," following one of the longest bull runs in U.S. history.

For example, the S&P 500 index of stocks has risen five out of the past six years. On Friday, it fell 3.19 percent to 1,971. But that's just a hair below where it was last year at this time. So if you have been invested for six years, you're still ahead of the game.

From this viewpoint, the August rout is just part of the typical "sawtooth" pattern that characterizes the stock market. Prices can zigzag up and down, up and down. Over time, you make money because you are patient, and assume the "down" zigs are smaller than the "up" zags.

Instead of fretting, investors should be looking for opportunities to buy shares at low prices before they resume their climb. "Historically, market downturns present some of the best opportunities to buy stocks," Azzad Asset Management told clients in its analysis of Friday's selloff.

But wait.

Maybe this stock plunge signals something much worse than a simple correction. Maybe prices are plunging because a new global recession is taking hold, making any rebound impossible for a long time.

So which is it, a buying opportunity or hunker-down time?

Here's a case for optimism:

— U.S. investors had been too upbeat for too long, shaking off the Greek debt crisis and the Chinese economic slowdown. But now, they are more clearly seeing the bad news and pulling back. So nothing is actually worse; we're just resting after having partied too hard earlier.

— Consumers and homebuyers are still in a good mood, and they are driving an expansion that will keep the U.S. economy going in the fall. This is just a summer squall that will pass.

Here's a case for pessimism:

— When China unexpectedly devalued its currency last week, it was sending the world a frightening message: Its economy is a mess. If China is no longer going to need massive amounts of oil, coal, corn, copper and other commodities, then huge numbers of miners, drillers and farmers are going to be out of work, triggering a global downturn.

— European shares are also sending a strong signal that the Continent's growth is in trouble again. Despite cheaper energy, more central-bank stimulus and favorable currency rates, Europeans still can't get their markets moving.

In September, policymakers at the Federal Reserve will meet to decide whether to raise interest rates for the first time in nine years. Savers wishing for safety may root for an uptick in the interest payouts on their bank deposits.

But stock investors may hope the Fed holds off for a while longer. Low interest rates can help companies expand at a lower cost — and expanding businesses tend to help stock prices.

Tough decision in these complicated times.