UPDATE 2-Yellen and Fed raise flag over some U.S. equity valuations
(Adds graphic, additional details on valuation)
By Rodrigo Campos and Caroline Valetkevitch
July 15 (Reuters) - The Federal Reserve on Tuesday voiced concern about stretched valuations in certain corners of the U.S. markets, including small cap, biotechnology and social media stocks, as well as the leveraged loan market.
The unusual comments from the Fed's monetary policy report - the first time in 14 years that the Fed has commented specifically on valuation of a particular equity sector - that accompanied Fed Chair Janet Yellen's semi-annual testimony to Congress, hit stocks in riskier sectors of the market.
Yellen said in remarks to the Senate Banking Committee that valuations across equity markets remain generally in line with long-term averages, but the Fed's report said the forward price-to-earnings multiples for smaller companies and those in the biotechnology and social media sectors appear "high relative to historical norms."
Well-known names such as Facebook, LinkedIn and Yelp slipped after the news. Shares of Yelp Inc were among the hardest hit, falling 2.8 percent to $69.14 a share, and the Nasdaq Biotech Index also fell, losing 1.6 percent.
"It's very unusual for the Fed chairman to take a micro view of a specific industry group. Usually the comments are very top level. So I think the Fed is a little more in tune with what has been bothering the market. My thought is it's late, but not too late in terms of recognition," said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.
Last week the equity market weakened, with notable declines in small-cap names. The Russell 2000 has lost 4.6 percent in the last seven trading days, while the Nasdaq Biotech index is off by 4.8 percent.
Throughout 2013, social media and biotechnology shares were among the market's most popular names, posting massive gains as investors, particularly hedge funds, piled in. Meanwhile short-sellers who saw the stocks as overvalued were forced to reverse those bets as they lost money. The Global X Social Media ETF, which includes Facebook and LinkedIn among its holdings, rose 64 percent in 2013. Continuación...