Investors need not fear an across-the-board, multi-year stock
market crash, if for no other reason than the psychological
component of the market prevents it from doing what so many
people believe it will do. The average S&P 500 P/E Ratio is
nowhere near the level that would trigger such a crash anyway.
This fact was recently acknowledged before Congress by Federal
Reserve Chairwoman Janet Yellen.
At the same time, however, Yellen called valuations in
small-cap biotechnology and social media companies "substantially
stretched." As I pointed out
at the time
, something would be very wrong with the market if these
particular stocks did not have high valuations; a valuation is
the Street's way of making a stock's risk more or less in line
with its return.
The comment would have been perspicacious if delivered in
March, before social media stocks fell by 27% in just nine weeks,
and before biotechnology stocks fell 20% in just five weeks. No
one is immune, it seems, from, the market's insatiable need to
look to the past, expecting to see the future reflected as in a
So if biotechnology and social media are two dogs that have
had their day, which dogs are headed for trouble now?
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