Stocks continue to defy gravity, gaining more ground in recent days, as they recover from last month’s mini correction. While underlying economic fundamentals appear positive, there are growing fears of a looming correction. They centre on a range of economic and geopolitical fissures, which, in conjunction with increasingly frothy stock prices, have left pundits concerned that the slightest dilemma could trigger a full-blown run on the market. If that occurred, it would gain tremendous momentum, because of that anxiety triggering an ever-cascading effect of investors storming for the exits, leading to a market crash.
The latest event to elevate these fears is Trump’s trade policy, which has sparked considerable apprehension that a major trade war is imminent. This combined with inflationary pressures and rising interest rates could sharply impact financial markets. According to some analysts, stocks appear overvalued relative to economic fundamentals, making them vulnerable to economic and political disturbances.
Analysts from investment bank Morgan Stanley believe that markets are in what they describe a late cycle environment, where volatility increases, and the danger of a major correction grows. Recently, the co-president of banking behemoth JP Morgan stated that markets will continue their gains for a year or two but that there is growing uneasiness, as the number of risks surrounding the economy continue to grow.
Then it worth considering that, without a doubt, stock valuations are starting to appear expensive. The price-to-earnings (P/E) ratio for the Dow Jones Industrial Average is 26.41 compared to 21 a year ago, while the leading benchmark S&P 500 Index is trading at 26 times earnings compared to almost 27 times this time last year.
Nonetheless, it is well below the highs of the tech boom when the value of the index rocketed to a massive 44 times earnings in late December 1999.
According to independent analysis, the S&P TSX Composite Index is valued at 20 times earnings, which is a little less than the S&P 500 but still higher than the TSX Composite’s historical average.
This indicates that stock valuations are becoming a little frothy which is heightening market jitters.
However, recent economic reforms, including Trump’s significant tax changes, firmer oil, as well as metals prices, and a more robust globally economy should lift corporate earnings, meaning that stocks may not be as frothy as originally thought. That means there could be further to run for the current nine-year bull market, which has been the longest ever for the Dow Jones Industrial Average.
Regardless, it’s always good practice to prepare for market corrections, because they are an inevitably a fact of life for stock investors. The growing anxiety surrounding stocks, despite robust economic fundamentals, is reflected by the fact that gold remains firm.
You see, gold is considered the best safe-haven asset and a solid hedge against uncertainty, making it a popular asset to hold when markets are jittery. That means any further crisis or corrections should give gold a leg up, giving gold miners a healthy lift with many having performed poorly since the start of 2018.
Seabridge Gold Inc. (TSX:SEA)(NYSE:SA) is a development-stage gold company that is down by 8% for the year to date, leaving it attractively priced. It is developing the high-quality KSM gold project in British Columbia and recently announced a remarkable 302% increase in inferred gold resources at the Iron Cap deposit, which is sited within the project. The attractiveness of its valuation is underscored by its high value of gold reserves per share, meaning that as gold rises, its shares should surge.
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Fool contributor Matt Smith has no position in any stocks mentioned.