Morningstar's Take on the Economy
Our instruction manual for downturns, the falling dollar, the Fed, and more.
If recent market turmoil has kept you up at night, you're not alone. We've been up, too, combing through the economic data, revisiting our stock forecasts, and keeping a close eye on the recent purchases and sales of some of our favorite fund managers.
Our sector experts and investing specialists have also been covering specific economic events--and how they may affect your current holdings and investment decisions. An uncertain economy and a rocky market can be a time of great anxiety, but also great opportunity. We'll be keeping our eyes peeled and our ears to the ground to keep you informed on the latest developments and investment ideas. Visit this page often for our latest commentary.
Latest Articles and Analysis
The Bureau of Labor Statistics recently reported that the CPI rose at an annualized rate of 4.5% in January, above the rate for 2007 as a whole. This data suggests that inflation is not a 1970s-style problem, but something that investors should have on their radar screens. Rising inflation threatens investment performance, and a slowing economy is not necessarily an antidote for inflation. In this recent Stock Strategist, analyst Bill Bergman discusses what inflation is, how it is measured, and how it has been behaving lately. Although the possibility of higher inflation may mute expectations for stock returns, for long-term investors, it still makes sense to put money on the table for undervalued stocks right now. Inflation matters for deciding which ones to buy.
The Upside of Downturns
Although calling a recession is a slippery business, Morningstar stock analyst and former Fed economist Bill Bergman did point out in early December that several indicators suggest a recession is likely getting under way, and he offered some stock picks that can block and tackle well in a tough economy. >> Click to read more.
But recession or not, recent volatility has made many stocks much more attractively priced, and Morningstar growth investing specialist Toan Tran is looking for opportunities. In a recent Morningstar GrowthInvestor blog post, he likened bear markets to emotional meat grinders. But, he wrote, for those who keep a level head, there is an old saying: You make all your money in bear markets, you just don't know it until later. >> Click to read more.
Meanwhile, Morningstar Ultimate Stock-Picker's Portfolio manager Justin Fuller is keeping a close eye on the opportunity-takers--specifically, the buy and sell decisions of a group of investment managers who have attractive long-term track records and experience dealing with and profiting from past market volatility. Recently, many such managers have moved portions of their portfolios into the murkier or more beaten-down sectors of the market, while others are calling for capital from their existing shareholders, indicating that for the first time in years they see the opportunity to put meaningful amounts of capital to work at attractive prices. >> Click to read more.
How can you take advantage of the down market? With uncertainty in the air, it can be tough to be disciplined about investing, but staying the course with dollar-cost averaging, and even increasing the contributions to your investments can pay dividends, wrote Morningstar analyst Annie Sorich. Get more tips for a slowing economic environment in her recent report. >> Click to read more.
If "buy low, sell high" is your objective (and it should be), a down market offers you just the opportunity to get started. But is the market overall truly cheap? By the looks of the S&P 500, yes. Morningstar now covers 2,000 companies, including more than 450 of the S&P's constituent holdings, and we can roll up those estimates to come up with a fair value for the index as a whole--and it's currently looking undervalued, say Morningstar director of ETF analysis Jeffrey Ptak. One way to invest in the index is the SPDRs Trust (SPY) ETF, which, at the end of January, was poised to rip off a double-digit gain. >> Click to read more.
The Fed certainly was looking to ease recession concerns when cutting interest rates 50 basis points at the end of January, following an earlier emergency cut of 75 basis points on Jan. 22. Although Fed actions can lead to market gyrations, Morningstar fund analyst Lawrence Jones suggest investors exercise caution in attempting to take advantage of these developments. Learn more about how recent rate cuts may impact your portfolio. >> Click to read more.
A Closer Read on Jobs Data
Morningstar stock analyst Joel Bloomer points out that the recent Fed actions are solid evidence that the economic data is indeed as bad as it seems--including jobs data. He has dug into some of the employment indicators, noting early signs of weakness in the labor markets and reasons to be suspect of some labor data. But he has found a possible silver lining: pockets of undervaluation among some employment-service companies in our coverage universe. >> Click to read more.
While the Fed has prioritized fighting off recession, another fear has also weighed on the markets and investors' minds: inflation. The value of the dollar versus the euro dropped 10% in 2007, following another 10% drop the year before, and is down more than 40% from its high in October 2000, fund analyst David Kathman reported in January. But even though U.S. celebrities have been waving around wads of euros in music videos, Kathman advocates investors keep a cooler head and think twice before betting against the dollar with currency funds. >> Click to read more.
One of the major culprits behind recent volatility has been the tightening credit market. Warren Buffett repeatedly stated that he was baffled by the waves of liquidity sloshing around the world and warned of the risk of a seize-up in the credit markets. Buffett, of course, was right, wrote Morningstar growth investing specialist Toan Tran. The tightening of credit certainly causes many problems in the short term, he explained, but this too shall pass. >> Click to read more.
Subprime mortgages have played a key role in the tightening credit markets, and in December, Morningstar fund analyst David Kathman took a broad look at the impact of the subprime mortgage crisis on both bond and stock funds. The liquidity crisis caused ripple effects in all kinds of investments without direct subprime exposure, including some previously thought to be safe. Here are some tips for checking your exposure. >> Click to read more.