Review: What Happened The Last Time Janet Yellen Warned About Stock Market Valuations

Janet Yellen is pretty smart. She likely has access to more information than pretty much any investor out there. If you had to pick someone who would be able to predict where the economy (and by extension the markets) will go, she would at least be on the very short list.

She recently suggested that the stock market is overvalued. Whether she is right is an open question. But as the author of this article did, it’s worth looking at what happened the last time she made a prediction about market direction.

Two years ago, she said social media and biotech stocks were overvalued. Since that time, biotech stocks have underperformed the S&P 500 Index, and social media stocks have outperformed the S&P 500 (I guess it shouldn’t surprise me that there is a social media index floating around out there).

Admittedly, this is not much of a sample size, but this is exactly what we would expect to see. Trying to predict the market is a coin flip. Just by chance we would expect someone to be right (absent fees and other frictions) about half the time and wrong the other half. The market is so incredibly interconnected and complex there is simply no way to reliably predict where it is going to go next.

So focus on the basics. Build your portfolio for the long term, take an appropriate amount of risk, and focus on risk factors that actually have a positive expected return.

For more on how to do this, take a look at our ebook “Making the Markets Work for You.”


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