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 mirror.
So if biotechnology and social media are two dogs that have had their day, which dogs are headed for trouble now?
This article was originally published on MarketIntelligeneCenter.com