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On Wednesday, Janet Yellen warned investors of the potential dangers of high equity valuations. US stocks sunk as market participants reacted to the news, but have since recouped those losses.

On Wednesday, Janet Yellen, chairwoman of the US Federal Reserve, warned investors of the potential dangers of high equity valuations in conversation with International Monetary Fund Managing Director Christine Lagarde. 

US stocks sunk as market participants reacted to the news, with the Dow Jones Industrial Average (INDEXDJX:.DJI) dropping over 170 points during Wednesday trading and eventually closing down 0.5 percent, or 86.22 points, at 17,841.98 points. The NASDAQ Composite (INDEXNASDAQ:.IXIC) also saw a dip, sinking 0.4 percent, to 4,919.64 points, as did the S&P 500 (INDEXSP:.INX), which took a 0.5-percent dive to 2,080.16 points.

Yellen crying wolf? 

Those reactions show that investors certainly took Yellen’s warning to heart, but it’s possible they should have thought twice before doing so. After all, predictions she made last year regarding the social media and biotech sectors ultimately did not come to pass.

For example, the social media companies whose valuations she considered inflated — such as Facebook (NASDAQ:FB), Twitter (NYSE:TWTR) and LinkedIn (NYSE:LNKD) — all beat forecasts and even raised their guidance for the remainder of the year. In terms of biotech, the iShares NASDAQ Biotechnology Index (NASDAQ:IBB), the biggest biotech ETF, has seen major gains since last July, going up 50.23 percent in the last 12 months.

No interest rate rise yet

Yellen also pointed out the potential dangers surrounding low long-term interest rates in her talk with Lagarde.

“When the Fed decides it’s time to begin raising rates, these term premiums could move up and we could see a sharp jump in long-term rates. So we’re trying to communicate as clearly about our monetary policy so we don’t take markets by surprise,” she said. Peter Jankovskis, co-CIO of OakBrook Investments, told the Financial Post that Yellen was likely “buying some time” and trying to “jawbone the market.”

In terms of when exactly that rate hike will come, at the moment it’s anyone’s guess. April employment figures from the US were released Friday and proved to be less than perfect as they show economic growth, but not enough to warrant an immediate rise in rates. Analysts have dubbed it a “Goldilocks” jobs report as it was just right for raising stocks. Of course, those stats are evaluated on a monthly basis and the Fed will definitely be keeping an eye on them.

Stocks soar on Friday

The main indices had not only made up for Wednesday’s losses by Friday morning, but also soared above levels seen midweek. The S&P 500 came back up 1.4 percent, to 2,117.26 points, and Dow Jones jumped up 1.47 percent to reach 18,187.84 points just before noon.

The oil price saw some small gains on Friday morning as Chinese crude imports took some stress off oversupply concerns. WTI crude oil futures gained $0.34 to hit $59.28 per barrel, although Brent crude dropped 0.38 percent to hit $65.29. The gold price also saw a boost, and was sitting around $1,188.60 per ounce at 12:00 p.m. EST.


Securities Disclosure: I, Kristen Moran, hold no direct investment interest in any company mentioned in this article. 

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