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Five Upsides to the Downturn

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to the "Friday Five." After a rough few days in the market, we here at the "Friday Five" are looking for any silver linings we can get. Here we me, with five upsides to the downturn, is Morningstar markets editor, Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: You're welcome, Jason. You know I always like to see the glass as half full.

Stipp: So I'm hoping that you have five things that will make me feel a little bit better about what the market's been doing lately.

Glaser: Yeah, I hope so.

The market downturn gives us some opportunities to actually buy stocks for the first time in a while.

We're going to get a chance to assess our risk tolerance.

Rates are going to continue to be low for home buyers or potential refinancers.

It will be a good time to plan that European vacation.

And, finally, I think this could start a virtuous cycle which will get the economy solidly back on track.

Stipp: Well, for a while there, the market had been going up and up, and it seemed like there were no bargains to be had. But things might be changing a little bit on that front.

Glaser: Yeah, there were some small pockets of opportunity, but they were very little pockets. And we're certainly seeing them expand. We're off 10% from where the S&P's high was, and that gives us opportunities to buy high-quality companies.

I think most investors have a list of dream buys that they'd like. And some of them are getting cheap enough that you can actually get into those stocks at a reasonable price, at a good discount to their intrinsic value, and these are good long-term holds.

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Stipp: So some of these days, when the market is down 3% or 4%, I think it's a real stress test for you and for your portfolio. What can you learn from that?

Glaser: It gives you a chance to take a look at your asset allocation and make sure that it actually makes sense. If you need a lot of money right away, like you have to buy a home, or you're sending someone to college, or you need money for retirement, we've said for a while, and you've heard for a while, that you can't have that short-term money in stocks. And this volatility shows you why.

So when you see all the movement in the market, it gives you an opportunity to say, "Wait. I actually need some of this to be safe and sound. I can keep it in cash. I can keep it in short-term bonds," or, "Hey, I've got 20 years, or 30 years, until I need to use this. Stocks are a good place for it to be, and I'm willing to accept this volatility, for potentially higher returns down the road."

Stipp: And, maybe, as point number one says, add a little bit more to that position?

Glaser: Yeah, you can get some high-quality names and ride them for the future.

Stipp: So, for number three, the Fed has been saying something over, and over, and over again. And it seems like this volatility might give them reason to say it over, and over, and over again, for a little bit while longer.

Glaser: Rates have been really low for a long time. And it looks like they're going to continue to be low for a long time. One of the things that people have been speculating about is when the Feed is going to raise their interest rates.

They've already been talking about, they see the economy getting better. And there's been a lot of speculation, that even by the end of 2010, or certainly 2011, they'd have to start raising interest rates before inflation became a problem.

But with all of the problems that are happening in Europe right now, tightening monetary policy is probably the last thing on anybody's mind. So I think this pushes out when interest rate hikes are going to come. And that's a good thing for people who rely on low interest rates, such as homeowners, or people wanting to refinance their mortgage.

Now, looking at it on the flip side, for people who have a lot in cash, it certainly isn't great for them. But there are people who can take advantage of those low rates.

Stipp: So, for number four, Jeremy, let's say I just need to get away from it all. The downturn could maybe offer me the chance to save a few bucks?

Glaser: Yeah, absolutely, or save a few euros, as the case may be. Europe, you know the euro continues to hit its lows. It has come off its very low lows. But certainly, it's a lot cheaper to go to Europe now than it was a year ago or two years ago. So anybody looking to take that Italian vacation, now might be the time to do it.

Stipp: OK, well, I'll certainly check with my travel agent on that one. So, for number five, Jeremy, we've talked a lot about how investors may be staying up late at night. Is there any upside to all that worrying?

Glaser: Absolutely. The upside is that you get to watch great infomercials all night long. And the more people that buy Snuggies, or ShamWows, or Ped Eggs, or any of the other great products on late night TV, the more money we have flowing out of consumers' pockets back into the economy, help restock inventories, help get that virtuous cycle going again.

And it should...you know we're already doing pretty with our recovery, but it could push us over the edge and help any of the woes in Europe. We could overcome that, and put stocks on a better path.

Stipp: Well, it sounds like an offer I can't refuse, Jeremy.

Glaser: Yeah, it would be hard to.

Stipp: Thanks for joining me.

Glaser: You're welcome.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.