Fed Chair Janet Yellen gave a speech titled “Finance and Society,” on Wednesday at a conference sponsored by the Institute for New Economic Thinking, which was founded in October 2009 with an initial pledge of $50 million from George Soros.
The prepared text of her short speech was mostly boilerplate, with Yellen claiming that the Fed is doing a good job of monitoring the financial system and maintaining its stability. She has said so several times before. On the other hand, her comments in a subsequent discussion with IMF Chief Christine Lagarde at the conference caught the markets off guard. In particular, she stated that equity valuations are “quite high.” She’s made similar comments before too, yet stock prices sold off on the “news” that she still thinks stocks aren’t cheap.
She’s obviously trying to do her best to prepare the financial markets for the start of Fed rate hikes:
The prepared text of her short speech was mostly boilerplate, with Yellen claiming that the Fed is doing a good job of monitoring the financial system and maintaining its stability. She has said so several times before. On the other hand, her comments in a subsequent discussion with IMF Chief Christine Lagarde at the conference caught the markets off guard. In particular, she stated that equity valuations are “quite high.” She’s made similar comments before too, yet stock prices sold off on the “news” that she still thinks stocks aren’t cheap.
She’s obviously trying to do her best to prepare the financial markets for the start of Fed rate hikes:
We need to be attentive, and are to the possibility that when the Fed decides it's time to begin raising rates, these term premiums could move up and we could see a sharp jump in long-term rates. So we're trying to, you know, as I've repeatedly said, communicate as clearly about our monetary policy so we don't take markets by surprise.
Regarding the stock market, she added:
I guess I would highlight that equity market valuations at this point generally are quite high. Now they're not so high when you compare the returns on equities to the returns on safe assets, like bonds, which are also very low. But there are potential dangers there. And in interest rates, obviously not only short but long-term interest rates are at very low levels. And that would appear to embody low term premiums, which can move and can move very rapidly. We saw this in the case of the taper tantrum in 2013 where there was a very sharp upward movement in rates and you do have divergent monetary policies, potentially around the world.
On Thursday, the S&P 500 rose 0.4% following a report showing that weekly initial unemployment claims remain extremely low, averaging just 279,500 over the past four weeks. On Friday, following the release of April’s “Goldilocks” employment report, the S&P 500 soared 1.3% to close at 2116, only 0.1% below the record high on April 24. Investors seem to have concluded that notwithstanding her warnings about valuations, Yellen remains the Fairy Godmother of the Bull Market.
This isn’t the first time that Yellen has given investment advice. In her prior two semiannual congressional testimonies on monetary policy and accompanying Monetary Policy Reports, valuations were mentioned. Notably, her tone has become increasingly cautious. Yellen’s qualifiers have gone from “in-line with historical norms,” to “somewhat higher,” and now to “quite high.” Let’s review, with the key words italicized by us for emphasis:
(1) In Yellen’s 7/15/14 testimony, she said: “While prices of real estate, equities, and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms."
The Monetary Policy Report that accompanied her testimony noted: “…valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities.”
(2) According to the same July report: "Nevertheless, valuation metrics in some sectors do appear substantially stretched--particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year." Yellen added in her remarks: “In some sectors, such as lower-rated corporate debt, valuations appear stretched and issuance has been brisk.”
(3) The 2/24/15 Monetary Policy Report stated: "Overall equity valuations by some conventional measures are somewhat higher than their historical average levels, and valuation metrics in some sectors continue to appear stretched relative to historical norms."
(4) At her last press conference, on March 18, Yellen was asked to update her views on the overall valuation of the market and on the biotech and social media sectors. Her curt answer was: “Well, I don’t want to comment on those particular sectors. You know, as we said in the [February] report, overall measures of equity valuations are on the high side but not outside of historical ranges.”
(5) Last Wednesday, as noted above, she said: “I guess I would highlight that equity market valuations at this point generally are quite high.”
The S&P 500/400/600 forward P/Es were 15.6, 17.2, and 17.9 on July 15, 2014;17.2, 18.2, and 18.9 on February 24 of this year; 16.9, 18.3, and 19.4 on March 18; and 16.7, 18.1, and 19.0 last Wednesday.
This isn’t the first time that Yellen has given investment advice. In her prior two semiannual congressional testimonies on monetary policy and accompanying Monetary Policy Reports, valuations were mentioned. Notably, her tone has become increasingly cautious. Yellen’s qualifiers have gone from “in-line with historical norms,” to “somewhat higher,” and now to “quite high.” Let’s review, with the key words italicized by us for emphasis:
(1) In Yellen’s 7/15/14 testimony, she said: “While prices of real estate, equities, and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms."
The Monetary Policy Report that accompanied her testimony noted: “…valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities.”
(2) According to the same July report: "Nevertheless, valuation metrics in some sectors do appear substantially stretched--particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year." Yellen added in her remarks: “In some sectors, such as lower-rated corporate debt, valuations appear stretched and issuance has been brisk.”
(3) The 2/24/15 Monetary Policy Report stated: "Overall equity valuations by some conventional measures are somewhat higher than their historical average levels, and valuation metrics in some sectors continue to appear stretched relative to historical norms."
(4) At her last press conference, on March 18, Yellen was asked to update her views on the overall valuation of the market and on the biotech and social media sectors. Her curt answer was: “Well, I don’t want to comment on those particular sectors. You know, as we said in the [February] report, overall measures of equity valuations are on the high side but not outside of historical ranges.”
(5) Last Wednesday, as noted above, she said: “I guess I would highlight that equity market valuations at this point generally are quite high.”
The S&P 500/400/600 forward P/Es were 15.6, 17.2, and 17.9 on July 15, 2014;17.2, 18.2, and 18.9 on February 24 of this year; 16.9, 18.3, and 19.4 on March 18; and 16.7, 18.1, and 19.0 last Wednesday.
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