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By Jeremy Glaser and Christine Benz | 01-22-2016 06:00 AM

5 Things to Understand About the Market Sell-Off

The market overall is not exactly cheap and still fraught with uncertainty, but patient investors will find select opportunities among moat stocks that can weather the storm.

Christine Benz: Hi, I'm Christine Benz for

Stocks experienced yet more volatility this past week. Joining me to discuss what the recent market action should mean for individual investors is Morningstar markets editor Jeremy Glaser.

Jeremy, thank you so much for joining me.

Jeremy Glaser: You're welcome, Christine.

Benz: You have five key pieces of insight for investors, but before we get into those, let's talk about what you think has been driving stocks down recently.

Glaser: It's impossible to point to one specific item that is causing all this volatility, but you have to remember that it started with worries about China that grew into worries about general global growth and emerging markets. That has led to a big sell-off in oil, which in turn caused fears over problems in the energy sector. Are there a lot of loans in the financial sector, particularly banks that maybe were lending to energy firms at pretty aggressive rates? What happens if there are a lot of defaults there? Does that create a kind of financial crisis? Does that create the kind of financial interconnectedness that we saw back in 2008 and 2009? Is that going to repeat itself? That's been a big worry.

You add in that the Federal Reserve raised rates in December, and now we're waiting to see what the Fed policy is going to be: What's the future of interest rates in the United States?

When you add all these up together, you certainly have a recipe for a lot of volatility, particularly when you came in at valuation levels that were reasonably high. The market was priced for things to go well. Then you add in all these question marks, and that's really driven stocks lower.

Benz: You say that even though stocks have fallen quite a bit so far this year, the fact that starting valuations were pretty high means that they aren't yet all that cheap.

Glaser: It's important to keep this in perspective. Even with the decline that we've seen so far this year, which has been pretty substantial in some sectors, and even with the flat year we had in 2015, over the last five years, we still have had 8% annualized returns on the Morningstar US Market Index, a really broad-based index. That's a pretty good return. When you look at it from those levels, it doesn't seem like such a big drop, even if it has happened suddenly in a very volatile fashion. It's a correction, which is something that we're going to experience in the market on a pretty regular basis and isn't something that should come as a total surprise when it happens, or be a reason to panic in any way.

When we think about valuations, we like to look at Morningstar's price-to-fair value. This metric takes our stock analysts' fair value estimates for all of the stocks that they cover, which is predominantly larger-cap names, and compares that to where those stocks are actually trading, and then we look at the median stock. Right now, the median stock is trading at about a 12% discount to what we think it's worth, which is similar to the kind of discount we saw during the eurozone crisis in the summer of 2011, but it's a far cry from the kind of discounts we saw at the depth of the financial crisis, where there was a 45%-50% discount on the median stock in our universe. So, things are starting to get cheaper, but they certainly are not at the point where equities, broadly speaking, look very undervalued.

Benz: The median price to fair value for all of the companies in our coverage universe is obviously a broad brush. When you dig below the surface, do you notice any pockets of the market that appear to be cheap right now, even as some others may be relatively more expensive?

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