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Remembering Yellen's awful biotech call last year

As a stock market analyst, Janet Yellen makes a pretty good Federal Reserve chair.

Nearly a year ago, on July 16, 2014, Yellen famously warned of "substantially stretched" valuations in some biotech and social media stocks. However, her admonition carried little weight particularly in biotech, where a year of big deals and strong growth has pushed shares in the sector higher and higher.

In the past 12 months, the iShares Nasdaq Biotechnology exchange-traded fund has rallied 52 percent. Over the same period, the S&P 500 has gained just 9.7 percent and the Nasdaq as a whole is up about 20 percent.

While that doesn't necessarily mean biotech isn't overvalued, it does mean that investors who took Yellen's warnings as advice and bailed on the sector missed out in a big way. (Tweet this)

Yellen issued another cautionary note on the market a few weeks ago about overvaluation.

"If Ms. Yellen and other Fed officials had some insight into stock valuations, their pronouncements might be stabilizing," respected market veteran Burton G. Malkiel, chief investment officer at $2.4 billion Wealthfront, wrote in a Wall Street Journal critique for Tuesday's editions. "But neither the Fed nor professional investors have any special expertise in second guessing the collective wisdom of market participants."

Malkiel pointed to another famous Fed proclamation—from former Chairman Alan Greenspan, whose widely cited "irrational exuberance" warning in 1996 came amid a bull market that had four years left before the dotcom bubble popped in 2000.

Instead of making statements that encourage investors to time markets, Malkiel suggested Fed leaders warn of the real dangers posed by debt, both in the fixed income and equity markets. Margin debt on the New York Stock Exchange, for instance, hit a record $507 billion in April.

"If the Fed believes that reckless bank lending to finance leveraged takeovers is occurring, they should sound an alarm. If they believe that stock-market speculation on margin has fueled an unsustainable rise in stock prices, they have the power to raise margin requirements," he wrote. "But gratuitous statements about equity valuations do nothing to achieve the Fed's goals of sound financial markets and steady economic growth."