Tuesday, June 2, 2015

Burton Malkiel On Janet Yellen's Stock Picking Expertise

From The Wall Street Journal, "Janet Yellen Is No Stock Market Sage: If you sold your biotech stock based on the Fed chair’s assessment of the market in July, you’d be sorry now." by Burton G Malkiel:
If Ms. Yellen and other Fed officials had some insight into stock valuations, their pronouncements might be stabilizing. But neither the Fed nor professional investors have any special expertise in second guessing the collective wisdom of market participants. Market professionals have had an abysmal record in judging whether the market as a whole is “overvalued.”

Nor has the Fed distinguished itself when opining on market valuations. In December 1996, then-Chairman Alan Greenspan famously questioned whether stock prices exhibited “irrational exuberance.” The market rallied sharply into early 2000, and anyone buying equities after Mr. Greenspan’s speech would have received generous long-run returns even after the market declines after the bursting of the dot-com bubble of 2000 and the housing bubble of 2007. An investor who put $10,000 into an S&P 500 stock index fund immediately after the “irrational exuberance” remark and held on while reinvesting dividends would have almost $40,000 today.

Since July, when Ms. Yellen suggested that biotech stocks had “stretched” valuations, the iShares Nasdaq Biotechnology exchange-traded fund has rallied about 40%. It wasn’t simply speculators who caused the price increase. Sophisticated companies purchased biotech companies at extremely generous premiums over their market prices.
The entire article is worth a read.

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