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Crafting an Investment Plan for a Downturn

It might be boring, but setting a reasonable asset-allocation framework and buying high-quality stocks is a good way to make the best of a market downturn.

Central bankers managed to keep the financial world from falling off the cliff this week. Between China's rate cut, Federal Reserve chairman Ben Bernanke's comments that the Fed is ready to act, and news that Spain was poised to ask for a bank bailout all managed to soothe some investor worries. But at best, these moves have just bought a small amount of extra time. The Greek elections still loom large on the horizon, and some extra cash for Spain's banks is not going to suddenly revive the European economy.

There is still an unusually large amount of uncertainty in the global economy, and the choppiness of the stock market in recent weeks is a reflection of that. Unless Europe pulls a rabbit out of its hat, it seems unlikely that the choppiness is going away anytime soon. So far, the concerns over the health of the global economy has sent stocks from being almost fully valued in March to looking 13% undervalued today according to our staff of equity analysts. But even that 13% discount is a far cry from the 23% discount we saw in October of last year or the 45% discount at the peak of the financial crisis. It is very possible that some of the worst-case outcomes from the ongoing saga in Europe are priced into stocks. Markets could easily fall from here if the situation continues to deteriorate.