Perhaps Stocks Were Too High After All

The question of questions:

Why did we have so much volatility in the financial markets in the fall and early winter?

This was extreme volatility by any measure.

The fact that it happened while the U.S. was in an extreme growth spurt which took down unemployment, raised corporate profits, raised wages, and all of this without much if any inflation is one of the great economic mysteries of our age, paralleling in its own way the Great Depression.

I would respectfully like to offer a few possible answers, and if you see them as clearly mistaken, please do not be shy about questioning me about them.

First of all, the Reagan explanation: When, a short time after the terrible stock market crash of 1987, the Gipper was asked why the market had fallen so much, he had an amazingly smart answer. "I’ve heard it said," the President pronounced, "that the market was just too high.”

Scoffers scoffed, but some of the great minds in finance, especially my dear friend and colleague Dr. Phil DeMuth, have found that a key metric for forecasting stock market movements is if the index is far above or far below its recent multi-year average.

That is, it’s not just a question of whether the market is high on a price-earnings basis or a price of earnings versus a coupon, but whether it’s high just as a measure of an absolute price versus previous recent prices.

Yes, if stocks get far too high relative to recent prices, that’s often a signal that they are about to go down. It sounds too easy to be true and sometimes it is, but sometimes it isn’t.

So, yes, maybe stocks had just gotten too high in the period of mid and late 2018 and there was reason enough to sell. People and machines just wanted to take some money off the table and buy some shoes with it. So writes Ben Stein in The American Spectator. 

Ben Stein is a writer, an actor, and a lawyer who served as a speechwriter in the Nixon administration as the Watergate scandal unfolded. He began his unlikely road to stardom when director John Hughes as the numbingly dull economics teacher in the urban comedy, "Ferris Bueller's Day Off." Read more more reports from Ben Stein — Click Here Now.