How to Avoid Bubble Trouble in Your Portfolio

Dodge toil and trouble by keeping an eye on your retirement date.

Susan Dziubinski 25 March, 2021 | 1:36AM
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Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Although the stock market has experienced some volatility this year, market watchers are saying that we're headed for a stock market bubble. Joining me today to discuss the topic is Christine Benz. Christine is Morningstar's director of personal finance. Hi, Christine. Thank you for being here today.

Christine Benz:
 Hi, Susan. It's great to be here.

Dziubinski: So, are we in a stock market bubble, in your opinion?

Benz:
 I think you can look at it in a few different ways. One is starting with market valuation, and if you look at a measure like Shiller PE, which is a cyclically adjusted price earnings ratio for the whole market, for the whole U.S. market, you can see that we're about double the historic medians and averages for Shiller PE. So, that's lofty. And we're back near where we were in the late '90s, which is the last time that Shiller PE peaked out. So, that's a worrisome sign.

When we look at the Morningstar's price to fair value for all of the companies in our coverage universe, it's a little bit less worrisome. I would note that it's a global coverage universe. So, arguably, lower valuations overseas bring that down a little bit. But it's less of a warning light being flashed by that measure.

One other thing that I pay attention to, though, Susan, is that when you look into the price to fair values for various parts of the market, you see some overvaluation in certain segments. So, in small- and mid-cap growth stocks, in certain sectors like technology, it does appear that stocks are pretty expensive. 

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Susan Dziubinski

Susan Dziubinski  Susan Dziubinski is director of content for Morningstar.com.

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