When Janet Yellen speaks, pay attention or else risk losing money.
Yellen's latest comments, on the stock prices she and her buddies shouldn't be watching to begin with, conjured up images of ones made by predecessor Ben Bernanke. Oddly, Bernanke's comments also came in May and during a time when the Fed was trying to lay the groundwork for a QE exit.
"I would highlight that equity market valuations at this point are generally quite high." -- Janet Yellen, May 6, 2015
"If the data supports it, the Fed could take a step down in the next two meetings," Bernanke to Congressman Kevin Brady, R-Texas, on May 22, 2013. He was referencing "tapering" bond purchases, which had been supporting stock prices.
The market in both cases reacted similarly -- harsh. Back when Bernanke threatened to remove the days of easy money from rich billionaires, stocks swung sharply to the downside on the session. In effect, Bernanke created the infamous financial media jargon term known as the "taper tantrum." On Wednesday, Yellen's musings sent stocks spiraling, and the mood on Wall Street to switch gears to expecting a rate hike this year (it was being pushed out to 2016 amid sluggish first-quarter macro data).
The market didn't want to believe the Fed is going to be data dependent, but Yellen squashed that and everyone's animal spirits. In the process, she has informed all investors that, for now, good news on the economy (like recent ISM readings that signal acceleration in growth this quarter) will be bad news. And this happened just as the ADP employment report suggested Friday's nonfarm payrolls print could be somewhat decent, which, yes, would be bad news.
Keeping up? Great! The bottom line is that investors owe it to themselves to figure out what Yellen is sensing -- because said investors may be holding a bag of overvalued assets. Here are three areas of the stock market that look frothy (for good measure, I will add valuations on startups with negative cash flow, and the M&A market).
Social Media Stocks
Twitter (TWTR) shares were slaughtered not because earnings leaked, but the raw numbers didn't justify the valuation. LinkedIn (LNKD) crushed on earnings. Those are but a few of the more prominent names in the richly valued social media space to get walloped on earnings, or lack thereof. Seeing that type of reaction is a clear sign of the hot-money crowd chasing momentum the last several months instead of calculating a company's intrinsic value. Momentum chasing is made easier thanks to rampant Fed liquidity, which Yellen signaled could come to an end sooner than expected.
Excluding Apple (AAPL), as the company's valuation, in my opinion, doesn't reflect its long-term earnings power or cash on the books today. But what about the non-Apples of tech land? Not too sure about you, but the latest round of tech earnings didn't impress. And where they did impress, not too sure if the company's stock is worthy of trading 10% or more above its historical P/E mean (this is often a note easily found at the bottom of stock research reports -- analysts do valuation comparisons).
Note: The Nasdaq's old closing record of 5048.62, dating back to the dot-com era and March 10, 2000, was hurdled on April 23. Interesting that Yellen's comments on equity valuations arrive after that lovely feat.
Housing Recovery Stocks
Love Home Depot (HD), a fundamentally strong company. But the valuation on the name looks full. The same could be said for Lowe's (LOW), and many suppliers of the U.S. housing recovery. These names have feasted on people's renewed interest in owning a home, which has been fueled by the specter of low rates and loosening credit standards. The rate aspect of the equation, according to Janet Yellen, may be about to change -- causing owning a home (and maybe auto borrowing, which has surged) to become less attractive and, subsequently, the sector's equity plays.