It seems the term well above turned out to be Janet Yellen’s foolish enthusiasm?
Earlier in the week, The Federal Reserve said in its most current monetary policy report that valuations for stocks “have increased to a level significantly higher than their median of the past three decades.”
It starts the old memories flowing back to former Fed chief Alan Greenspan speaking about how two decades ago he felt stocks looked superficial during the tech bubble.
On December 1996, Greenspan made the “irrational exuberance” — more than 3-years before the market hit a tailspin. Some will dispute that Fed policies under Greenspan were able help inflate the bubble to begin with.
Yet again, there are Fed critics who think that Yellen’s predecessor Ben Bernanke Yellen herself should have a look in the mirror prior to voicing their displeasure about bubbly stock prices.
Fed critics are raising questions
Barrow Funds principle David Bechtel, said, “She helped cause it and now she’s talking about it? It’s like we’re in a parallel universe.“
Since Yellen took over as chair interest rates have only increased once. Maybe Yellen’s hands are tied, since when she and other well-known Fed members talk about delaying future rate hikes and falls, and when the Fed proposes that soon there will be more rate hikes the market frequently rallies.
Bechtel says, “The Fed has painted itself into a corner.”
Nevertheless, Yellen appears to be worried about how lately the stocks have held well. Despite an increase in volatility this year, because of a rise in concern over the global economy’s health, the Dow and S&P 500 have both risen 2%.
Yellen is correct about valuations being above average. Currently the S&P 500 is trading at 16.4 times earnings estimates for the subsequent 12 months — according to FactSet Research data, above the 10-year average ratio of 14.3.
Pick your strategies carefully
CNN Money’s Fear and Greed Index, a measure of investor sentiment, is yet again seeing signs of Greed.
However, the valuations are nowhere near the preposterous levels of 2000 or for that matter 2007.
This is why certain experts believe that you can still find some bargains in the market – you just need to carefully pick your spots.
Needham Funds portfolio manager Christopher Retzler says, there are some good bargains in health care. He thinks investors are worrying too much about what might happen to the sector if next November Hillary Clinton beat Donald Trump.
Because of this, health care is one sector that has fallen behind the broader market. He owns Thermo Fisher (TMO), Express Scripts (ESRX), and Gilead Sciences (GILD.
Retzler also feels there are some good opportunities in tech — companies that because of myopic focus have been overlooked like the FANG foursome of Amazon (AMZN Tech30), Facebook (FB, Tech30), Google (GOOGL, Tech 30) Netflix (NFLX, Tech 30) and (Alphabet).
There is some good value in the market
In addition Retzler owns the most mega tech firm there is: Apple (AAPL, Tech30).
Bechtel claims that you can still find some good value in the market, especially in consumer and energy stocks – in spite of the big rally in oil stocks this year a result of hoping the recent rise in oil prices will stick and there will be an increase in demand for oil.
On the consumer side, he likes WD-40 (WDFC) and on the energy company Western Refining (WNR). Even with another pullback they might hold up well in the bigger market.
When all is said and done, Yellen’s worry about market valuations are genuine. It certainly makes sense for investors to be more careful when thinking about where to put their money.
Luckily, this bull market is debatably the most hated rally ever. Consistently Skeptics have been bearish on stocks for last couple of years — and we still have not had a big crash. There were only two minor corrections pullbacks at 10%.