The Fed and its Sector “Selection”

by Laura Ehrenberg-Chesler on July 31, 2014

in equity market,Fed policy,Investment Strategies

This morning in our research from Ed Yardeni, there was a commentary about whether or not the Fed should be opining on the value of, or investment merit of, specific sectors in the equity markets.  I thought it was worth sharing because it was also a great reminder of how investors take risk alongside entrepreneurs to try to improve our lives.

In her congressional testimony on July 15, Yellen said that small-cap stocks were overvalued, with valuations especially stretched for biotechnology and social media stocks. So far, that’s been bad investment advice given the recent run-up in the stocks of Facebook and Twitter on better-than-expected earnings results.

 In addition, one has to wonder whether it is even appropriate for the Fed to express opinions about specific stock groups. Lots of sophisticated investors purchase biotech companies that have no earnings and are regularly raising cash to stay in business. These investors do so knowing that the outcomes are binary: The companies they invest in will either find a cure for a disease or they won’t. Their new drugs will either be approved by the FDA or they won’t. They might be acquired for a huge premium or they might not, or might go out of business. Why should the Fed weigh in on the valuation of biotechs? After all, speculators are providing the funding that might actually cure diseases. Or they might get wiped out. Why should the Fed get in the middle?

 

Leave a Comment

Previous post:

Next post: