When Janet Yellen talks, the market listens.
Tech stocks took a breather from their torrid valuations
As she was discussing the stock market in detailed terms, calling out specific stock sectors on overvaluation concerns, a level of public detail not often communicated by a Fed chairman, certain high flying tech stocks she alluded to took a breather from their torrid valuations.
While Yellen said that generally stock market valuations didn’t look expensive, she did note that tech and social media high flyers might need to be questioned.
“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,” comments in the full policy report accompanying her testimony said.
Tech stock tumble on Yellen’s statement
After this statement shares of certain tech stocks questioned by some analysts tumbled. Yelp, for instance, whose core business model has been questioned by some stock analysts, dropped 4 percent rather swiftly. Tesla, which trades at 190 times 2014 earnings, was down nearly 3 percent. But as Ben Levisohn in a Barron’s Stocks To Watch blog points out, Tesla was down before the announcement.
Levisohn attributed some of the decline in Tesla Motors Inc (NASDAQ:TSLA) to news Bayerische Motoren Werke AG (ETR:BMW) had closed a deal with Samsung SDI to make batteries for their cars. Samsung SDI also makes batteries for Apple and has recently expanded into the auto business and plans to spend billions of dollars on batteries for its cars. “Competition here we come,” notes Levisohn. After Yellen spoke the price of Tesla continued to move sharply lower.
The NASDAQ Composite (INDEXNASDAQ:.IXIC) index, a broad measure of tech industry strength, was down nearly 1% on the remarks while Facebook Inc (NASDAQ:FB) was down nearly 2 percent nearing the lunch hour, while Twitter took a dive by approximately 1.5 percent.
Divergence in tech valuations
Interesting to note was the divergence in tech valuations as Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) and Amazon.com, Inc. (NASDAQ:AMZN) generally avoided the tech slide, currently down near 0.25 percent. Both firms have been working to diversify their business models, with Google in particular expanding well past its initial search business model.
Some of the questioning of the Fed by Senators took place during the semi-annual “Humphrey Hakwins” testimony in which the Fed chairwoman provides lawmakers and update on U.S. economic policy. US Senator Elizabeth Warren, for instance, took a more aggressive approach, grilling Yellen on regulation of large banks and saying the Fed did not have a proper plan in place to break the banks apart. Warren noted that JPMorgan Chase, with 3,391 subsidiaries, is much more complex with three times the number divisions as Lehman Brothers had when it failed in 2008 and triggered the worst of the financial crisis. The Fed plan is all but 35 pages long on the issue.