When Nasdaq’s market cap plunged from $10 billion in 2016 to $5 billion in 2019, it was the most volatile stock market crash in history.
But in the intervening years, its share price has risen by over 30%.
Now, Nasdaq is trading at a price that is more than 50% higher than its peak in late 2018.
The market is so volatile that one analyst, John Paulson, said in 2018 that he could buy a Nasdaq stock in the near future at $1,000, and that if the stock went to $2,000 that he would not be able to afford to own the stock.
This was a remarkable feat in itself, as stocks are volatile.
But Paulson’s prediction came to be known as “Paulson Rule,” a term coined by financial analyst Jeff Gundlach, who has predicted that stocks are trading at levels that are “totally unsustainable” for the foreseeable future.
That’s because the price of a stock’s share price fluctuates so much based on a variety of factors, including demand for the stock, supply, and demand for other assets, such as debt, according to David Rosenberg, a senior fellow at the Brookings Institution and author of The New Market for Financial Services.
Even when markets are calm, investors have the tendency to buy when they think the stock is cheap.
“The market has always been unstable and volatile.
So if you’re going to get into a market, it has to be very cheap,” Rosenberg said.
In the years after Paulson Rule, stock markets have been volatile for a variety, but the trend of falling stock prices is unique in that it is happening right now, said Paul Davenport, an analyst with J.P. Morgan Chase & Co. in New York.
While stocks have been going up, they are not going up in a way that people have been expecting.
That makes them a better investment because they don’t pay you back in the future,” he said.
The stock market has also been trading at the wrong pace, as evidenced by the rise in its share prices since Paulson rule.
It’s not clear whether the stock market is in a bubble or a trough, but it’s certainly one that has some of the characteristics of a market that has been in a downturn, said Andrew Ross, an investment analyst with Bank of America Merrill Lynch in New Orleans.
We’re in a market where it’s hard to predict the future, which is something that people don’t do,” Ross said.
“If you’re a stockbroker and you’re trading stocks, you can look at their history and figure out how the market has behaved.”
Even if the market returns to normal in a few years, there will still be a lot of volatility in it, Ross said, because the stock markets don’t reflect real world market conditions.
Paulson’s rule applies to all kinds of stocks, not just those in the financial sector.
He said that in the past, financial stocks have traded at a premium to stocks in the healthcare, energy, and technology sectors, and stocks in these sectors are generally much less volatile than those in financials.
For example, stocks in health care and energy have historically been relatively stable, but since the financial crisis, the healthcare sector has been trading lower, and the energy sector has seen its market capitalization drop by over 60% since 2000.
“It’s a really complicated question, because there’s a lot more volatility in the health care sector than the energy industry,” Ross added.
If Paulson is right, the market will be far more volatile than it is today.
According to Rosenberg, the Paulson rules would only apply to stocks with a significant risk of being taken over by an outside buyer.
That would include companies that have a lot to lose if a competitor took over their business.
For example, if the company went public, its shares could suffer a severe loss.
But even in this case, the impact on the stock price would be minimal.
Because the stock will be owned by a single person, it would be much harder for a company to lose a large amount of money by taking over its competitor’s business.
Still, Paulson might not be the only person who would be able a stock to go through a market crash, if it were to take over a competitor’s share of a company.
Markets are highly speculative.
So the best strategy for a stock owner is to stay out of the market, even if it means being exposed to a lot volatility.