Stocks Fall as Yellen Details Exorbitant Valuations

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Chairwoman of the Federal Reserve, Janet Yellen, released a report last week, illustrating her concerns over the “substantially stretched” valuations on “smaller firms in the social media and biotechnology industries.”

In addition to this report, she also testified before Congress dispelling concerns over a possibly bloating inflation.

Yellen explained that “some broad equity price indexes have increased to all-time highs in nominal terms since the end of 2013. However, valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities.”

But it doesn’t seem like investors were very optimistic, in the wake of her report and testimony. While she spoke to Congress, shares started to plummet: Twitter went down 0.6%, Facebook dropped 1.7%, and ETF, a biotech firm backed by Nasdaq, fell 1.5%. The Dow and S&P500 also went down, decreasing 0.23% and 0.05%, respectively (rates by PrimeTrade).

This came directly after a rise in stocks earlier that day which was a reaction to earnings reports from JPMorgan Chase, Goldman Sachs and Johnson & Johnson. Those reports described surprisingly high earnings, causing turmoil in the stock market.

Yellen’s remarks are indicative of an increase in interest rates by the Fed, which might come sooner than expected. However, the majority of investors are convinced that they won’t budge until 2015 comes around.

John Buckingham, chief investment officer at Al Frank Asset Management, explained, “It’s an observation of what’s already occurred.”

But some economists argue that the interest rates should come down sooner, as recent data shows that prices for consumers have been on the rise while the unemployment rate has been going down. Regardless, it doesn’t seem that the Fed will be doing any such thing.

“If the labor market continues to improve more quickly than anticipated,” Yellen explained, “then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned.”

Yellen’s observation is that the economy overall is improving, but that it still requires the support of the central bank.

Regarding when those interest rates will actually be raised, Yellen said, “There’s no formula or mechanical answer I can give you.”