Morningstar - Q2 2021 - 9

EXHIBIT 1

at a price/fair value ratio of 1.07, indicating
that U.S. stocks were trading about 7% above what
they're worth. Meanwhile, interest rates have
never been lower. Though they've ticked up
recently, 10-year Treasury yields were still a measly
1.62% as of March 16. Accounting for inflation,
their yields are firmly negative.

This Isn't Normal The rise and fall of GameStop was stunning.
GameStop Share Price
$400
300
208.17

What's an Investor to Do?
I think the market is in the middle of a manic
episode. I see anecdotal evidence to support this
everywhere I look: the hoopla about meme
stocks, the boom in special-purpose acquisition
companies (or SPACs, the so-called blank-check
companies), Tesla TSLA buying bitcoin,
teenagers dispensing financial advice on TikTok,
and more. The strongest evidence is the
growing chorus singing a familiar tune: " This time
is different. " It's never different. Historically
high stock valuations and historically low bond
yields aren't fertile ground for future growth.
So, what is an investor to do?

Everyone knows the classic Warren Buffett-ism
about being greedy when others are fearful and
fearful when they're greedy. I love the symmetry
of this saying. It is the contrarian investor's
playbook distilled to its essence. Over the past year,
investors had the opportunity to be both greedy
and fearful. Greed might have done some
good in early 2020, when pandemic fears surged
and markets plummeted. But it was a brief scare,
at least for the markets. In fact, it was the
shortest bear market in history. One year later, as
some people are still living under lockdown,
many markets are at all-time highs. Now may
be the time to be a bit fearful.
I don't think investors should try to time the
market and call a top. I do suggest that now is a
good time for them to take a close look at their
portfolios and ask some simple questions. Are they
comfortable with their asset allocation? After
markets bounced back, stocks might represent
a bigger piece of their portfolios. This might be an
opportune time to rebalance. Have low yields
pushed investors into risky sectors of the bond
market in search of income? With junk-bond yields
recently touching all-time lows, I am skeptical
that investors are being paid enough to take such
risks. It might be time for them to derisk their

200
100
0
02/13/02

02/13/07

02/13/12

02/13/17

03/15/21

Source: Morningstar Direct. Data as of 03/15/2021.

EXHIBIT 2

We Are Here In an unprecedented environment, stock valuations are high and
interest rates are near rock bottom.
Cyclically Adjusted Total Return P/E Ratio

Long-Term Interest Rate
25%

50
40

38.12

20

30

15

20

10

10
0

1.09
01/1871

01/1901

01/1931

01/1961

01/1991

5
0

02/2021

Source: Robert Shiller. Data from January 1871 to February 2021.

fixed-income allocation, especially as credit risk
tends to be positively correlated to equity
risk and can diminish the diversification potential
of a fixed-income allocation.
Once investors have gotten comfortable with
their asset allocations, probably their best
bet is to walk away for a while. Vanguard founder
Jack Bogle said, " The stock market is a giant
distraction from the business of investing. "
These words have never rung truer. In recent
months, the stock market has been a major
distraction. Its movements have been influenced
by newly minted retail investors, who themselves
are looking for a distraction after months of

leading virtual lives. The platforms they're using
to engage with each other are themselves
distractions. And they make use of these platforms
on the world's best-ever distraction device-
the supercomputer phones we carry around in
our pockets every day. If there's ever been
a moment to tune out all this noise, I'd argue
it is right now. Doing a whole lot of nothing
might be the ultimate contrarian approach in a
market that's gone manic. K
Ben Johnson, CFA, is director of global exchange-traded
fund research at Morningstar Research Services LLC. He is
a member of the editorial board of Morningstar magazine.

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9
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