Fed chief: Social media stock overvalued

Stock in tech companies plunged on Tuesday morning after Federal Reserve Chairwoman Janet Yellen suggested shares in social media and biotechnology companies are overvalued.

Delivering her annual monetary policy report to Congress, the Fed chief wrote that “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.”

{mosads}Yellen said “risk-taking” in the sector has increased, unlike other areas that have remained more stable and kept valuations in line with historical averages.

“Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched,” she wrote.

Tech stocks sank quickly after Yellen’s remarks. Shares of Facebook, Twitter and Google all went down by at least 0.9 percent in morning trading. Nasdaq’s biotechnology index was down by about 2 percent.

Tech advocates, who have been battling claims that the market is in a bubble, revolted harshly.

“We are not!” said John Melloy, chief executive of Twitter stock analysis firm StockTwits.

Yellen’s warning about the stock market comes at a time when the major indexes have been soaring to record highs. The Dow Jones industrial average has risen above 17,000, and investors have been reaping months of steady gains.

Yellen suggested in her report that the stock market isn’t at risk of a major bubble, even as she questioned the value of the tech companies.

Broader measures, she said, are “generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities,” Yellen claimed. 

Still, officials at the central bank have signaled they are closely tracking the surge in financial markets.

Minutes released last month showed Fed officials in June discussed whether investors might be underestimating their risk.

“Participants also discussed whether some recent trends in financial markets might suggest that investors were not appropriately taking account of risks in their investment decisions,” the minutes stated.

“In particular, low implied volatility in equity, currency, and fixed-income markets as well as signs of increased risk-taking were viewed by some participants as an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy.”

Yellen is testifying about her semi-annual report to the Senate Banking Committee on Tuesday.