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Is the Stock Market Overheated?

By Jeremy Bowman, Jason Hall, and Trevor Jennewine – Updated Oct 4, 2021 at 9:33AM

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Stocks are pricey, but are they primed for a crash? Here's the best way to think about the current market.

The stock market has been on a remarkable run over the last 18 months with the S&P 500 more than doubling from its pandemic-era low, even as much of the economy is still struggling with the pandemic. 

But is the market due for a pullback? In this segment from Beat and Raise recorded on Sept. 1, Fool contributors Jeremy Bowman, Jason Hall, and Trevor Jennewine tackle that question and discuss how best to invest in today's volatile market.

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Jason Hall: The question is, is this more sign of an overheated market? Who wants to weigh in first? We'll take a minute weighing in on this before we move over to our next hour. Jeremy, you're not muted, you weigh in first.

Jeremy Bowman: Sure. I don't know if the whole market is overheated, but a lot of these cloud stocks and growth stocks are trading at very rich valuations, and I think that they've maybe hit some ceilings. This year, we saw a peak in the sector in February and then they've been challenged as far as stock movements since then. I think Okta (OKTA 26.46%) trades at a pretty rich valuation. I think it's price-to-sales is around 30. There's a lot of growth pulled forward there, and it's going to take the company some time to grow into that. I think the stock is up maybe seven times in the last three or four years. I know it's going to be hard for it to deliver another performance like that. But I still think, based on its momentum and the performance of the business it should outperform.

Jason Hall: Trevor, I know we talked about earlier with CrowdStrike (CRWD 5.46%) as much as the stock's been a big winner, we think the business can keep winning. What do you think here?

Trevor Jennewine: Yeah, I agree. I think, like Jeremy said, that some of the valuations have gotten pricey, especially with the cloud stocks. I'm a CrowdStrike shareholder and I'm not concerned to see the stock sell off after earnings. They were strong earnings, and I think the company has a long way to go depending on how you look at the market. I was reading an interesting article today, it was comparing the Shiller P/E versus interest rates. The Shiller P/E is very high, which then indicates the market is overvalued. Interest rates are very low, which tends to indicate that stocks are the place to be. A little bit of conflicting evidence there, and I think there's a lot of ways to look at it. I'm not changing my investment strategy based on where the markets are, I will say that.

Jason Hall: I think that's the key. I think there's definitely potential for it to be an overheated market, and valuations are clearly, on historical levels, are stretched, and everything Trevor said too is absolutely true, too. Two diametrically opposed things can be true at the same time, is the case. But the bigger thing, I think that Trevor talked about, Jeremy, I think you would agree here is thinking about having an investment strategy based around your goals and your financial timelines and not whether or not you think the market is overheated in this moment or not. How do you make yourself anti-fragile? You don't have all of your exposure to stocks if you're retiring next year, and you need cash. You have your emergency fund to cover those unplanned expenses. You have near-term planned expenses and cash, too. Whatever that amount means for you, is it six months of expenses, and you're retired or is it five years of expenses? Whatever it is, you figure out, and that's how you make yourself anti-fragile. You don't have everything exposed to stocks because then that's when you get burned by the overheated market, so I think that's that.

Trevor Jennewine owns shares of CrowdStrike Holdings, Inc. and Okta. The Motley Fool owns shares of and recommends CrowdStrike Holdings, Inc. and Okta. The Motley Fool has a disclosure policy.

Stocks Mentioned

Okta Stock Quote
$67.43 (26.46%) $14.11
CrowdStrike Stock Quote
$124.07 (5.46%) $6.42

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