Fed's Concerns Trigger Another Selloff In Momentum Stocks
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Published: July 15, 2014 at 3:25 pm EST
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Social media and biotechnology stocks have been under scrutiny for their high valuations, raising concerns among many investors as well as the US Federal Reserve. In the Fed’s biannual report on monetary policy, the central bank voiced concerns over these so-called momentum stocks.
“Nevertheless, 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,” said the report. It also pointed out that the price-to-forward earnings ratios for small social media and biotech firms remain high relative to historical norms.
Lately, the tech sell-off and high valuations of internet stocks have been compared to the 90s dotcom bubble. David Einhorn of Greenlight Capital warned investors that this could be the second tech bubble in as many decades. He provided various reasons for his assertion, including how short-sellers were frequently being forced to cover their positions, how investors were rejecting conventional valuation methods, and how valuations of newly-listed tech companies were soaring on trading debuts.
On the other hand, Goldman Sachs strategist David Kostin said drawing parallels with the dotcom bubble was a useless activity; instead, he said highlighting the differences between the two phenomena was a more meaningful exercise.
The Fed’s report also said that valuations for the broader market were not too far off from historical averages, reflecting that investors were not excessively optimistic on equities. The implied volatility in the S&P 500 index, calculated from options has, also declined in recent months, reflecting improved market sentiment.
Momentum stocks, which include social media and biotech stocks specifically, experienced a selloff this year in March/April. The Nasdaq 100 fell nearly 2.7%– the single biggest decline seen in last two years. Concerns over whether social media companies can sustain user growth, and more importantly monetize them, have heightened this year.
The tech-heavy index Nasdaq 100 (NDX) is down 0.4%. Currently, Global X Social Media Index ETF (SOCL) and iShares Nasdaq Biotechnology Index Fund (IBB) are down more than 0.9% and 1.7%, respectively. Facebook Inc. (FB) is down more than 1%, Twitter Inc. (TWTR) nearly 1%, Tesla Motors Inc. (TSLA) more than 2.5%,
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Fed's Concerns Trigger Another Selloff In Momentum Stocks
