July 06, 2008 6:00 AM
The stock market has plummeted this year on high oil prices, a credit crunch, a weak housing market and rising unemployment. Paul Larson, editor of the Morningstar StockInvestor newsletter, spoke about these issues with Newsday:
Q: The Dow is down about 20 percent now, in real bear territory. Have we hit bottom here?
A: Your guess is as good as mine as to what the stock market is going to do short- to medium-term. But long-term, the market is undervalued and will go up.
Q: How did we get to where we are today?
A: Perhaps the thing that started this whole mess was the real-estate market popping. With real-estate values coming down, there was a contraction of available credit. That impacted consumer spending. When you combine this with high oil prices, which raises the cost of everything, that eats into consumer discretionary spending. Now you're seeing unemployment going up.
Q: How does all of this affect investors?
A: As in any economic situation, there are going to be winners and losers. Some companies do better than others, such as the oil companies. But then there are others not doing so hot, like those in the retail sector. But even within that sector, some are doing well, like Wal-Mart and Costco, as people trade down from luxury to just affordable.
Q.: Oil stocks would seem to be a good investment right now, if you can afford them.
A.: Well, you have to be cautious. ... There is some debate as to whether we are reaching peak in oil prices per barrel.
Q.: What sectors would you stay away from?
A.: Maybe the airlines. This is a sector that doesn't appear to have any competitive advantages at all. They're facing very difficult dynamics and huge cost increases because of the price of oil. There's going to be some capacity rationalization. Capacity rationalization is never pretty and always painful.
Q.: What has to happen to pick up the market?
A.: It all started with real estate, and it has to end with real estate. When real estate stabilizes, you're going to see credit losses at banks stabilize, and perhaps we'll even start to see an expansion of credit again. People may then start to spend a little more. This may give the Fed (Federal Reserve) a little more breathing room to raise interest rates and head off inflation.
Q.: What do you expect from the next Fed meeting?
A.: I would expect more of the same, no change in rates, but talking about inflation. Thus far this year, inflation has not been their primary worry. But they have finally acknowledged inflation is a problem and they're going to have to do something about it.
Q.: Then you think a rate increase would be a good thing?
A.: It would mean a strengthening of the dollar. If the dollar did regain some strength, that would also provide a little relief from oil prices.