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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