Stop that crazy Yellen!

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In 1996, when I was still a stock market noob, Allen Greenspan famously accused the financial markets of "Irrational Exuberance." There followed six years of rising stock prices, by the end of which, all concede, the market's exuberance had indeed grown irrational. But was the market really being irrational back in 1996? In hindsight, the answer is a resounding "no." The market only appeared slightly high because of the many indications that good times were on the way. Investors were simply more perspicacious than Greenspan. I attribute Greenspan's recent efforts to study and make sense of the markets , in part, to embarrassment at having blown this call.

In the years since, Federal Reserve Chairmen have rarely chosen to directly state a bullish or bearish position in the stock market, in part, I imagine, because they don't know what the market will do, they know they don't know what the market will do, and they don't like being wrong.

On Tuesday, the generally sensible Fed Chairwoman Janet Yellen decided, for reasons that are all to speculate about, to don a bubble-themed coat and tell the market what was what.

Janet Yellen downplayed the risk of bubbles today while wearing a coat covered by bubbles. http://t.co/F9sWGG4EPq pic.twitter.com/yOyUNOtEJo

- Binyamin Appelbaum (@BCAppelbaum) July 15, 2014

Yellen began by pointing out that current stock market valuations are well within their historically healthy range, and she deserves kudos for that: a great many market pundits and even money managers don't seem to know this. Yellen then shifted gears and claimed that stock valuations for smaller companies in the social media and biotechnology sectors were substantially stretched.

Make that "Substantially Stretched." Yes, I've promoted the phrase to title case and added quotes. Put it on the shelf next to "Irrational Exuberance" in the museum of things Fed Chairmen-and-women should never have said. I'm not arguing that small cap social media and biotechnology companies don't have high valuations- of course they do ! Who better? Can anyone name a class of companies so likely to have extraordinary growth in the future? For what should an investor be willing to pay a premium if not the possibility of extraordinary growth?

These are also high risk stocks, of course, since many will fail, and when they do, those who invested in them will lose all that premium they paid to get on board. Even those who play only social media and biotechnology index ETFs-Global X Social Media Index ETF ( SOCL ) and iShares Nasdaq Biotechnology ( IBB ) are good examples-can expect tremendous volatility. None of this means that these sectors are bad, or that these indices are bad investments, or that the stocks comprising them are bad investments. It just means they are not appropriate for everyone, but the same could be said of any investment.

As a financial journalist, I ask you this, Chairwoman Yellen. Please do not tell us when stock prices are "Substantially Stretched." Do we tell you how much to taper the Quantitative Easing ? Well, OK, we do that all the time. Still, we're trying hard to keep all of our ducks in a row, and you don't ultimately help anyone when you come along and knock our ducks in the dirt. 

Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC .


This article was originally published on MarketIntelligeneCenter.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: SOCL , IBB

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