Jason Stipp: I'm Jason Stipp for Morningstar. The markets took investors on a gut-wrenching wild roller-coaster ride on Thursday, with the Dow dropping as much as 900 points before recovering a little bit. Here with me to talk about what may have caused this, and why there still might be some legitimate fears in the market, is Morningstar markets editor Jeremy Glaser.
Jeremy Glaser: Thanks, Jason. I usually like roller coasters, but would prefer not to have ridden this one.
Stipp: Absolutely, I think you and a lot of other people. So I think that they're still sorting through what happened in the market today, but there are some theories out there that it might not have been all fundamentals. What are people saying?
Glaser: Yes. First off, we absolutely have no idea exactly why the Dow ended up plunging 900 points, but some theories have to do with technical trading glitches. That there seems that Procter & Gamble, in particular, had some very odd pricing. That it was traded over $60, and then, suddenly, was below $40, which just isn't...
Stipp: For a company like that, a consumer staples company, that doesn't happen. There's no reason that its value would change that much.
Glaser: There was nothing fundamental that would make Procter & Gamble worth that much less. So it's possible that there was a technical issue there, and that could have set off a cascading effect of the high frequency trading. A lot of the program trading that feeds on that, it sees that big of a move, and it goes ahead and makes its own move.
And we saw very quickly, the market rebound several hundred points. It's still down pretty substantially. But we saw, once humans got in front of it, they were able to put some money back in. I think we'll probably hear more about this in the coming days, but that first take, that seems like a reasonable explanation.
Stipp: Sure. Now, it seems like there are still some fears out there, and they may have been stoked by whatever caused this big drop. It seems like it did stoke some real fears there. The market is down more than it was this morning, when it sort of stabilized in the 1%-2% [loss] range. So what do you think is still lingering in investors' minds that may have just been riled up by whatever this massive drop was today?Read Full Transcript
Glaser: There certainly are real fears, and I think we've seen a confluence of factors that probably led to a lot of people being very afraid right now. The first has to be Greece. It's something we've been talking about for a long time, and it's something that's on a lot of investors' minds. And they've been thinking about it for a long time.
Exactly what is an EU/IMF Eurozone type of bailout going to look like for Greece? And the credibility of it is continuing to fail, because, right now, they're giving them some money which is great. They'll be able to make the payments which are due at the end of May. But it isn't 100% clear that they're going to be able to actually fix the fiscal situation that got them into the hole in the first place. The riots in Athens, that have been going for the last day, show how difficult it is to put these austerity measures into place.
So parliament voted for them, they've been approved, but it doesn't mean that they're actually going to be implemented. And that Greece will be able to get their budget deficit under control to that 3% of GDP number, which is where the Eurozone really likes that ceiling. It could be really difficult to do this, if people aren't amenable to making these cuts, and people aren't. And I think there's a real sense that Greece could become a lot worse.
Now, in and of itself, that's containable. But if we start worrying about Portugal, about Spain, and possibly even something like Italy, the issue becomes much, much larger. And if people don't believe that the Eurozone is able to stabilize Europe, and is able to stabilize that entire economy, there could be big fears, and big repercussions, across the global economy.
Now, we've already seen once how something relatively small, like subprime mortgages, could quickly snowball into a much bigger problem, given how interconnected the global financial system is. I'm not saying that Greece is necessarily in that same camp right now, but people are more attuned to those kinds of fears. And I think that has a big part of what's going on.
Stipp: And certainly, when people see those images like we were seeing on TV today, the rioting that was going on in Athens, it doesn't help calm their fears about the situation in Europe.
Glaser: It's something that's very disconcerting. And, of course, we have the UK elections that are going on as we speak, that could bring some policy changes, and no one is quite sure how that's going to go. The European Central Bank came out this morning and said they're not out there buying government bonds in sort of a quantitative easing program, that they're staying out of the market. And they don't seem to be as aggressive, as I think a lot of investors would like, to shore up Europe.
There certainly could be some pretty serious issues here. So I think a lot of why the market is down so much still now, is that, yes, the technical trading glitch, or whatever caused the huge drop, probably wasn't warranted, but there still are a lot of fears now. And it looks like investors are almost looking for an excuse to get out of some of their positions, and to move into some safer things, such as gold.
If we look at currencies, the dollar is doing very well against the euro, against the pound. People are going away from those currencies that they're a little bit more afraid of, and pouring into the dollar. That can have implications for U.S. exporters, which have enjoyed having a weak dollar for a long time now. So there are a lot of moving parts here. I think that's why you're seeing a lot of traders twisted up. A pretty placid day all of sudden becomes pretty eventful.
Stipp: So, I think from an individual investor's perspective then, a lot of people are still smarting from the recent downturn. They're still jittery from what they've been reading in the news. Now we see a huge drop, and then a comeback in the market, but still down 3%. Is it possible that I should think about my portfolio completely differently today than I did yesterday, given what we've seen this afternoon?
Glaser: Jason, you really have to take a breath, and almost take a step back. Because you shouldn't sell because everybody else is selling. That's not a good reason--In the same way that you shouldn't just buy when everybody else is buying. I think you have to really relook at your holdings, and look at your investment thesis, and think, why did I buy this stock, or this particular fund, in the first place? And does that investment thesis still hold?
If, even given all the turmoil, it still holds, then you should hold on to it. That's a good long-term holding. It may be a stock with great competitive advantages, or that still looks cheap today at current valuations. So if something has changed, and you don't think your investment thesis holds anymore, then maybe it does make sense to reallocate those monies, or reallocate that money, excuse me, to other areas. But it's definitely something, that people have to look at their portfolio. But you should do it with a clear head and shouldn't panic when you're evaluating your options.
Stipp: Well, sounds like good advice to me, Jeremy. Thanks so much for joining me.
Glaser: You're welcome.
Stipp: For Morningstar, I'm Jason Stipp, and thanks for watching.