Amid Rampant and Rising Fear, Stocks Are Looking Cheap

Investors scrambled for cover in the stock market last week. And understandably so.

The Fed said the road to economic recovery remained unusually uncertain, a sentiment that was quickly echoed by tech giant Cisco (CSCO). Some investors were especially attentive to Cisco CEO John Chamber's comments given his track record of being ahead of the curve.

But plenty of good news may be getting overlooked in a market gripped by one form anxiety after another. That pervasive fear has investors crowding into safe holdings like government bonds despite rock-bottom yields. It could also create a good window to get into what is increasingly looking like a cheap stock market.

Fears about a vicious bout of deflation in the U.S. have been rampant, for example. And yet consumer prices actually rose 1.2% in July at an annual rate, meaning that deflation remains more prophecy than reality (the deflationists will quickly point out, though, that minus gasoline and food, consumer prices rose a scant 0.1% in the month).

Germany Leads a Eurozone Rebound

Deflation worries replaced fears earlier in the year that eurozone was on the verge of an implosion. But quite the opposite has happened. Last week, the juggernaut German economy clocked in at a growth rate that would be annualized to higher than 9%. The strongest expansion since German reunification is lifting overall eurozone growth to a healthy 1% per quarter, the fastest rate in four years.

Now rising spreads on Irish sovereign debt compared to Germany are causing some skittishness. But investors should keep the situation in perspective. Indeed, more opportunities could be created if fears are blown out of proportion as they were with Greece a few months back.

The GDP of Ireland is merely $267 billion. At its current rate of growth, the nearly $4 trillion Germany economy adds on more than Ireland's GDP every year.

The Big Worries: China and the U.S.

Other major economies in the region are demonstrating a sharp resiliency too. The U.K. reported the strongest job growth in 21 years last week. The hiring follows a surprisingly sharp expansion in GDP.

A stronger rebound than almost anyone had expected is materializing across the Atlantic. And bears are now pointing to a slowing in what were recently seen as pockets of strength -- the Chinese and U.S. economies -- as reasons to take cover.

But much of the hyperventilating that Chinese policy moves to cool the real estate market would spiral into a broader collapse has proved unfounded. Indeed, Chinese policymakers have demonstrated an admirable ability to moderate the pace of their economy -- and that should be soothing to investors.

Of course, big problems do remain in the U.S. And signs of a slowdown amid stubbornly high unemployment soars are causing major skittishness. But investors badly burned by the financial crisis two years ago now seem to expect only the worst and pile into safe assets as a result. The turnaround in Europe, though, shows many of the fears may be overblown.

And that could lead to a rally for stocks if nerves eventually do calm.