Fed Chair Janet Yellen this morning warned about valuations in the stock market, saying that stocks in social media and biotech sectors appeared “substantially stressed.”
In her just-released semi-annual Monetary Policy Report to Congress, the Fed chair addresses the issue of tech valuations saying, “[V]aluation metrics in some sectors do appear substantially stretched. Particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.”
Several tech stocks, and particularly social media stocks including Facebook (FB), Twitter (TWTR) and Yelp (YELP) went red in early trading Tuesday following Yellen’s remarks. The Global X Social Media Index and Nasdaq’s biotech ETF (IBB) both declined more than 1%.
The overall market also pulled back, with the Nas, which has many tech and biotech firms among its components, shedding 1%.
Despite her warnings on these momo stocks, Yellen says the broader stock market is not overvalued.
“While prices of real estate, equities and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms,” she said.
This is the second time since March that a Fed official has triggered a sell-off by raising valuation questions. Back in March, Fed’s Dudley helped start an extremely frustrating environment for both the biotech and social media investors by citing stressed valuations.
In an interview with Barron’s, Rhino Trading‘s Michael Block said targeted statements such as these are part of the Fed’s “selective valuation call out strategy.” Block believes the Fed instead of controlling prices with bold new monetary policy, has been using “call outs” to cool off markets.