Jason Stipp: I'm Jason Stipp from Morningstar. After a couple of brutal days in the market this week we're checking in with Morningstar Markets Editor, Jeremy Glaser for his take on the situation.
Jeremy, thanks for joining me.
Jeremy Glaser: You are welcome Jason.
Stipp: So a big sell-off on Thursday followed by another sell-off on Friday, what's driving all of this activity as investors are heading towards the exits?
Glaser: Well, it's virtually impossible to ever pinpoint one exact cause for any given day's movement in the stock market. But I think overall investors are concerned about the global growth picture and particularly are concerned about China.
Going into this year and throughout this year I think there was some hope of global growth looking a little bit better that Europe really seem to be turning the corner, the United States continued to chug along and that China although slowing would be able to manage that slowdown that you weren’t going to have the hard landing as people used to talk about.
I think over the last couple of weeks and particular into this week. I think there are signs that maybe that thesis just isn’t going to hold and particularly in China. We've had a lot of bad news and kind of unusual news out of China when you have their devaluation of their currency. They said they are going to let the market decide and then kind of at the last minute intervene because the market was deciding too much. The intervention in the Chinese stock market, the weak manufacturing data I think it's really hurt the markets confidence of China's ability to manage the economy and to kind of manage this transition from this very investment led economy to more of a consumer driven one.
I think that’s been something that’s starting to concern investors as they think about what's the impact on Europe which has more direct trade with China. What's the impact on the United States? How does it impact global currencies? How does it impact the global monetary market, about commodities, what was happening with the emerging markets? I think as people revaluate that you are starting to see some of that shake out through the global stock market sell off.
Stipp: We also had Fed minutes recently. And the market had been very focused on the Fed and now the Fed and China. Are Fed concerns possibly contributing to the volatility?
Glaser: I think it has to be, I mean I think the Fed is just under such intense focus now as we approach the first meeting where it's even possible that they really consider raising rates. They are going to continue to be focused on that. And I would say maybe early in the week, September seemed like it was priced in as the likely candidate of when it was going to raise that seems to become less and less likely as the weeks' gone on.
Partially because the Fed minutes mentioned some international problems as a reason that you might want to wait, and we are seeing those in spades over the last couple of days to maybe that causes the Fed to step back and decide it's not quite time yet. So I think some of the volatility is also coming from that repricing of when the Fed is going to increase rates as we have said before I think for the average investor they shouldn’t care too much about it. But definitely in the short term it can create some waves and we're seeing that right now.
Stipp: If people think that Fed's going to raise rates later though would that be a positive for the market or not?
Glaser: It's been interesting that this is kind of maybe not moving in the exact direction that you would expect. Traditionally you might think well if the Fed were to raise rates that would be potentially slowing the economy down and maybe that'd be bad for the stock market over the long term. But I think investors are also saying that if they don’t raise rates at this point maybe that’s a sign that the economy is actually weaker than we originally thought that it can't support this rate increase and that’s not a good thing potentially for growth either and maybe speaks to some broader problems that could pop up across different companies earnings could popup there.
So I think you can see that really no matter what the Fed does, the market it could find something to be worried about. But these are really unconventional monetary policies that we've had put into place. So the exit from it is going to be unconventional too, we don’t really know how the market is going to react and again I think that’s what we are seeing right now is some volatility as people just try to figure out exactly what does it mean to move off of this floor zero that we have been at for so long.
Stipp: Are any areas of the market getting hammered worse than any other areas.
Glaser: Energy is getting hit the hardest and I think a lot of that is because oil prices continue to fall and we can add that to another factor that’s driving some of the volatility. That supply demand imbalance has sent oil lower earlier it is still very much in play and we are heading new six year lows here and oil is below $40 a barrel in the U.S.
We have a lot of supply and this concern that demand is going to be below that and as those prices come down the energy shares are coming down with it.
Stipp: And we can also say Morningstar has a fair value for the market as a whole we roll up our underlying company fair value estimates. What is the overall market evaluation looking like?
Glaser: So according to our equity analyst and remember this is only companies that we cover so that tends to be a larger cap companies a lot in the U.S. So as a snapshot of that portion of the market that median company there looks about 5% undervalued right now which is not a dramatic undervaluation by any stretch of the imagination, not nearly as undervalued as the median stock looked like say during the summer of 2011, at the height of the Eurozone crisis or certainly not anywhere close to where it looked like during the financial crisis.
So we've gone from maybe little bit overvalued to little bit undervalued. But more or less we're right around where we think fair value is.
Stipp: So if we are not seeing a lot of margin of safety in the market overall what about individual securities. Can bargain hunters find more opportunities now than they could before we started seeing some of the sell-off?
Glaser: There is more now if not a ton of, before the sell-off we could count the number of five stars on one hand now we're up to 32 which is not a huge number. Now a lot of those are in the energy and basic material section. That’s been hit the hardest we think in some cases unfairly. One company that we really like here is Exxon Mobil it’s a wide moat company and we think it has a low uncertainty that we are pretty certain about. What it's future path looks like? We think that’s trading at a really attractive discount right now at five stars.
But before you kind of maybe load up on more energy shares I think it's important to look at your portfolio make sure that you are total energy exposure something that you are comfortable with maybe do a portfolio X-Ray see what any mutual funds you own what kind of energy exposure it has as well lot of those risks maybe correlated and I think it's important in a portfolio context to really think about what you are buying.
Stipp: Anything outside of energy looking attractive.
Glaser: Few, Gap believe it or not the clothing retailer is in five star territory right now. There is a sense that their turnaround, at least the market has sensed the turnaround that they are trying to accomplish is not maybe going quickly enough but our analyst thinks that its very much on track. And that they are going to see some potential big gains from new inventory systems and from some brand repositioning's they are doing. She sees their shares as looking attractive right now.
Apollo Global it's an alternative asset manager. A narrow moat company that we think has a good specialization in these illiquid credit instrument something that we think will serve it well in the years to come. That is high uncertainty name so we're less certain about the path that one could take but for maybe investors it's more of a risk appetite that could be another interesting one to look at.
Stipp: Lot of Morningstar commentary has been saying that the conditions are ripe for volatility. We've been saying it for a little while as market evaluations. We are pretty full or in some cases overvalued. If you had to take out your crystal ball and predict if this volatility is going to continue or not what does it look like.
Glaser: Well, first off my crystal ball has been broken for quite some time. It's really hard to say over any short period of time exactly what the market's going to do. And I think anyone who tells you that they know what's going to happen the next month or three months in a year is probably not being totally frank with you. Now what you can learn from current valuations maybe what the long term returns are going to look like and if we say that shares look about fully valued right now.
We can expect kind of a fair return maybe not the kind of gaudy returns we've had over the last couple of years bouncing back from it's very low valuations or financial crisis. But certainly fair return you are going to be rewarded for the risk you are taking. But the path that we take to get there could be incredibly volatile I think like you mentioned a lot of the ingredients were there for that to happen.
These issues with China aren’t going away anytime soon. The focus on the Fed isn’t going away any time soon. As these extraordinary measures are lifted, even after the first rate increase that’s not going to be it. We're not going to just forget about the Fed we're going to have to be talking about it every meeting are they going to raise again? How fast is it going to happen? What impact is this having on the broader economy? Those questions aren’t going away.
A lot of these concerns about energy and the energy companies again not going away and when you have stocks that are really priced in, reasonably good growth and if that growth doesn’t materialize you could see some more volatility. So I think this really speaks to the importance of having kind of this long term plan that because you can't predict what's happening in the short term.
You don’t know what's going to happen next week or the week after really have to look out over that longer time horizon say I want to hold equities it makes sense my asset allocation I am willing to take on the risk. Hopefully we'll get rewarded for that risk and we think you will at these levels and really just sticking to that plan and not panicking when you see days like this and not getting too euphoric when they go up a lot and really sticking to it we think will make the most long term sense.
Stipp: Great perspective on the market. Jeremy, thanks for joining me.
Glaser: Thanks Jason.
Stipp: From Morningstar I'm Jason Stipp. Thanks for watching.
