Biotech Has Surged Massively Since Warning From the Fed

If valuations were stretched last summer, they're even more stretched now.

Investors are kicking themselves if they listened to Fed Chair Janet Yellen and the Board of Governors last July and sold their biotech stocks. 

As Bespoke Investment Group points out, the Nasdaq Biotech index is up well over 40 percent since Yellen's valuation comments. Here is what the Fed said in its Monetary Policy Report on July 15:

"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. Moreover, implied volatility for the overall S&P 500 index, as calculated from option prices, has declined in recent months to low levels last recorded in the mid-1990s and mid-2000s, reflecting improved market sentiment and, perhaps, the influence of ‘reach for yield’ behavior by some investors."

But since those comments, the sector has continued to rally. Here is the iShares Nasdaq Biotechnology ETF since June.

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The Fed wasn't the only one sounding the alarm about a potential bubble, and those fears have continued to rise along with the index. As Bloomberg pointed out earlier this month, the Nasdaq’s biotech companies have clobbered Nasdaq internet stocks in recent years. Here is a comparison of the Nasdaq Biotech and Internet stocks since 2011. As you can see, the divergence has grown substantially over the past year.

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In the Fed's defense is that social media hasn't fared as well. Here is a chart of the Global X Social Media index ETF over the same time frame.

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