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Stocks down as Yellen warns valuations are over historical averages

Federal Reserve Chair Janet Yellen  warned that stock valuations are “generally quite high,” and that “there are potential dangers” in a discussion yesterday with International Monetary Fund Managing Director Christine Lagarde.

Many analysts point out that stock prices, relative to corporate earnings, are higher than their historic norms. This could mean markets are headed for a rough ride as prices correct themselves. Markets dipped 0.7% midday, after Yellen’s remarks, reports NPR.

Overall financial stability remains modest

Despite comments about overall stock valuations being out of line with historical averages, Yellen noted that overall financial stability is still sound. “Risks to financial stability are moderated, not elevated at this point,” she said during the conference.

This is also not the first time Yellen and the Fed have expressed concern about stock valuations. In the July Federal Reserve Monetary Policy Report, the Fed reported, “Valuation metrics in some sectors do appear substantially stretched – particularly those for smaller firms in the social media and biotechnology industries.” In the nine months following those remarks, increases in the value of such stocks helped drive the Nasdaq Composite Index up about 13%.

Yellen cautioned that market volatility could increase when the Fed begins to raise its benchmark interest rate. “To the extent we do see risks developing, we’re taking action where we can,” she said. Yellen emphasized that financial regulation, not interest-rate policy, is the Fed’s main tool for heading off potential hazards, reports USA Today.

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.