Falling home values, rising unemployment, declining confidence among consumers and businesses and, lately, a swooning stock market. We may or may not be entering an official recession (defined as two consecutive quarters of shrinking economic activity), but either way 2008 has gotten off to a scarier start than most anyone predicted.

To lower your anxiety level and devise your own coping strategies — all without resorting to prescription medications — read this special report. You'll not only learn how the economy and markets might perform if we're in a real downturn (Breathe. Remember that knowledge is the key to overcoming fear), you'll also get timely advice on what to do about your finances, investments, job and home. The economy and the markets will bring what they bring. Keep reading and learn how to take it all in stride.

Recessions: Learn the facts
Spend too much time with CNBC or the Wall Street Journal these mornings and you'll be dreaming about breadlines and “The Grapes of Wrath” at night. Time for some perspective.

For the most part, the U.S. economy bounces back from hard times quickly. The downturn in the early 1990s is instructive. It had a similar starting point to the rocky period we're in. Then, as now, a financial shock related to the housing market caused problems. Then it was the collapse of the savings and loan industry.

Today it's the subprime crisis. The 1990-91 recession lasted eight months, and unemployment eventually peaked at 7.8% — not a staggering number but still more than 50% higher than the current rate. Home prices in the top 10 metropolitan areas fell 8.3% during the downturn and its aftermath. Today they're off 5% from their 2006 peak. Recovery in the 1990s was slow: It took until 1996 for housing to start rising again.

The stock market moved faster. It dropped 21% but bottomed out in three months. If we did enter a recession this past December, as many economists think, a replay of 1990-91 would mean further market declines now followed by a rebound later in the year. Not a terrible scenario. Unfortunately, it's not the only possibility.

At times a confluence of events sets a trap from which the economy can't easily escape. Pessimists see that possibility in a subprime-induced credit crunch. In the 1970s, the trap was stagflation, a combination of high inflation and low growth. The U.S. was already burdened by Vietnam War-related inflation when the Arab oil embargo sprung the snare. The economy jerked to a stop, but energy costs kept the inflation rate up and made recovery painfully hard to come by.

The 1973-75 recession lasted 16 months, about double the typical one. The Dow Jones industrial average fell 40% from its pre-recession high, or more than triple the decline we've seen since October's top. Unemployment peaked after the recession ended, at 9.1%.

Before you head for the medicine cabinet, take comfort in some important then-vs.-now differences. The Fed, and the feds, today act earlier in a downturn. The Federal Reserve has cut interest rates 2.25 percentage points since August. And Congress is putting money in consumers' pockets through tax rebates. Even more important, notes David Wyss, chief economist at Standard & Poor's, is the absence of high inflation, the real standard-of-living killer. Energy prices notwithstanding, inflation remains mild. It ran at 11% in 1974 vs. 3% last year.

Bottom line: A debilitating recession seems unlikely, but that doesn't mean you should do nothing. Instead, set yourself up for the opportunities that will come if the downturn is short — and keep yourself safe should the hard times stick around.

Shore up your balance sheet

Stock up on emergency funds. A good rule of thumb for a two-income couple is to keep three months of expenses in a high-interest savings account or money-market fund in case one of you loses your job.

In a downturn, which makes a new job harder to find, you'll want six months put away, says planner Mark Brown of Denver's Brown & Tedstrom. That's especially true if you're in an industry likely to be hit hard by a recession (say, construction or financial services) or if you're a one-income family. If you're self-employed, Brown advises you to stash as much as a year of expenses. "Everyone needs a lifeboat of liquidity, especially now," says Brown.

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