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Fed chief: Stock P-Es in line with history

Is the U.S. stock market a bubble ready to burst? Federal Reserve Chair Janet Yellen says no. In a post-meeting press conference Wednesday, the Fed chief said the broad stock market is trading at valuations that are within historical norms.

When asked if the rising stock market, which hit a fresh record after her comments, posed a risk to financial stability, she said: “We do monitor a number of valuation metrics — where valuations are (relative) to corporate earnings and in comparison with history — to get a sense (if we) are getting to valuations outside historical norms,” Yellen said. “I still don’t see that for equity prices broadly.”

There are critics on Wall Street who disagree with Yellen. They argue that the Fed’s easy-money policy is inflating the next asset bubble. Even Yellen herself on Wednesday said investor complacency and low market volatility “concerns me.”

The Standard & Poor’s 500stock index is trading at less than 16 times projected earnings over the next four quarters, which is roughly a percentage point higher than the long-term average, says Thomson Reuters. But P-Es are hardly at nosebleed levels as they were in 2000 when the P-E was roughly 30.

It was the third time Yellen rejected the notion that stocks are getting dangerously pricey. At her November confirmation hearing, she said the market wasn’t exhibiting bubble-like conditions. In May, she told Congress P-Es were not out of whack with history.