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Friday Five: Damage Report From a Tough Week in the Market

Jason Stipp
Jeremy Glaser

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five. It was a wild week in the market. Here to offer his take on the volatility is Morningstar markets editor Jeremy Glaser. Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: Most of the headlines this week pointed to China as the cause of the volatility that we saw. Was China behind the roller coaster?

Glaser: It's impossible to say that one factor is responsible for all the volatility on any given day or any given week. But China was obviously one of the big things that was weighing on the market.

Investors were reassessing the risk of what could happen to a slowing China. We didn't really get that much new news, but when you look at things like the currency devaluation and their stock market falling, at some of the government response being seen as not as competent as it had been in the past--fears really ratcheted up.

But investors need to put these fears into context. China is an important part of the global economy. A slowing China is going to have impacts on emerging markets, on commodities, on all sorts of different markets. But it's probably not going to have the kind of systemic risk that you saw in the 2008 crisis. It's not going to create any flash point right away that should get investors incredibly worried.

It's possible that it could slow down global growth. It's possible that there could be a recession that catches through... that the world catches a cold from China. But it doesn't seem like that's the most likely outcome right now. You look at data in the U.S. and elsewhere--things are holding up pretty well.

You should keep an eye on China; it's going to have an impact on growth. But it's probably not something that should cause you to make any big changes to your financial plan, or anything that should cause you to be particularly panicky.

Stipp: When you see the kind of volatility and stock drops we saw early in the week, bargain-hunters start to get interested, but were they finding many opportunities when they went out there in the market to look?

Glaser: It doesn't seem like a ton of opportunities have opened up during this correction, and as stocks bounced back so much toward the end of the week--and even if they're off a little bit so far on Friday--there just aren't a ton of new opportunities out there.

We talked to a lot of individual investors and also our strategists, Matt Coffina and Josh Peters. They said they didn't see anything truly emerging as durable value. We talked to some mutual fund managers; they all said that they're nibbling a little bit, that they're finding some things that are more interesting, but they didn't see any big sectors or big mis-pricings that were coming out there.

Right now, stocks look a little bit undervalued. On our metrics, we think they're about 8% undervalued--the median stock is 8% undervalued. And that is better than it has been, but it's a far cry from having a real, solid margin of safety built in to the entire market. That's certainly not there right now.

When you still see these mostly fully valued stocks, it doesn't mean you shouldn't hold equity--you should still have them as part of your asset allocation plan--but it's probably not a time where there's so many bargains that it's worth blowing that up and trying to take advantage of a once-in-a-lifetime opportunity. This certainly wasn't it. It was more a run-of-the-mill correction, and one that even corrected itself pretty quickly during the week.

Stipp: If China captured the most headlines this week, the Fed was likely a close second. Investors are wondering if this kind of volatility will cause the Fed to delay raising rates. What's your take on that?

Glaser: It would be impossible to think that September is now more likely after this volatility. Certainly the Fed is going to be very cautious about moving in September, but it doesn't mean that it's impossible. It's still something that's out there, that people will be watching very, very closely.

There are a couple of things that will be on their mind. The first will be that August jobs report that comes out at the end of next week. If that is unusually strong or even in line--given how wonky and weak that August report has been in the past--that could at least be a necessary step in order to see them raise rates. The inflation data that we got this week as part of the consumption report showed it slowing down a little bit. On a core level, it was up 1.2% on the PCE, Personal Consumption inflation, which is their preferred metric. That's far from their 2% level, and it actually came down a little bit, so maybe that makes them a little bit nervous and that's a push-off.

And then you do have to think about how they weigh what's happening outside of the U.S. It's not in their mandate to actually do that, but it certainly has to be on their mind--that they are worried about what was happening with the rest of the world, and if that could impact the United States and if they need to take that into account when they're doing monetary policy. So I think that means September is less likely, but again, not impossible.

But when we look at some of the economic data looking pretty strong: The revision to second-quarter GDP, some of the other data we got this week showed the economy continued to chug along. It seems like they still could very well raise this year. A little bit of volatility like this probably isn't going to stop them from raising rates forever. It's going to happen at some point. The exact day shouldn't matter too much to investors, but we could expect more volatility as investors worry about exactly when it happens.

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Stipp: And watch that jobs report next week. There were, believe it or not, other headlines this week. One of them was deal news: Schlumberger plans to buy Cameron for $12 billion. What's our take on that?

Glaser: Unsurprisingly, a lot of this other news maybe was not as widely reported, but I think this is an interesting deal, and our analyst Allen Good thinks that this really does make a lot of sense for wide-moat Schlumberger to buy Cameron.

These are the two companies that already are working together. They have a joint venture that's been very successful. And by bringing the two together, you bring in Cameron's surface operations, and when you get that expertise that they have there, it should help Schlumberger widen their moat, become a more profitable company, and also give them opportunities for new avenues of growth, which is really important for oil-services companies right now. They're obviously under a lot of pressure due to the low oil price environment. As we saw this week, as oil prices continue to fall, this could be an environment we're with for some time. Looking for other avenues of growth, and finding a good strategic partner like this, makes sense for the firm.

The only caveat here is price. They are paying a very full valuation for Cameron. So that mutes some of the benefits. But from a strategic standpoint, we think the deal makes sense.

Stipp: Sometimes it can be good when deals do go through; sometimes it can be good when they don't go through. Monsanto is walking away from its bid for Syngenta. What's our take on that?

Glaser: I think investors in the market had a sigh of relief when Monsanto said they were finally walking away from this. They've been kind of ratcheting up their price and were offering a very high premium to Syngenta in order to take their rival out. And their board had resisted, and there were some fears that maybe they were going to go even higher in order to get their board to acquiesce to these overtures.

Monsanto finally said, "Enough is enough." They walked away from it, and the stock shot up 8% or 9%, just due to the relief. We do think that they would have paid such a high premium, we were going to cut our fair value estimate by 15% if the deal had been done at the level that they were talking about. So certainly this is good news for investors, and it's good news that management had the discipline to walk away when they did.

Even after the shares did rally, they still look undervalued, and we still think that Monsanto is a pretty attractive name right now.

Stipp: A very busy week in the market, but thanks for keeping us on top of all the news, Jeremy.

Glaser: You're welcome, Jason.

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