If the U.S. stock market bubble bursts, gold and gold stocks could be well-positioned for the medium term. With the Dow above 21,000 and market participants continuing to hail coming policies from the Trump Administration as the catalyst, it is sometimes refreshing to be the voice of reason.
Snap: Bellwether the markets are topping out?
Snap Inc. (SNAP: NYSE) IPO’d last week and at least one columnist commented that it may signify the apex of a US equity bull market that refuses to die.
Snap’s initial offering afforded the company a value of $23.6 billion or $17 per share. That changed instantly upon the company opening at $24 a share. Snap’s stock hit $29.44 (more than $30 billion valuation) on Friday, but was in free-fall mode Monday, declining to a low of $24.61.
Snap’s market cap is still approximately $28 billion. The company has no revenue.
Snap or ‘Snapchat’ is an image messaging and multimedia mobile application. The founders had an idea to create a selfie app which allowed users to share images that were explicitly short-lived and self-deleting. The company had 70 million users in 2017 and while many doubted Facebook, it was able to turn its users into cash. Snap is a different model completely, so it is unclear if management can turn users into revenue.
Fundamentals behind US Stock Market – Growing Weaker
720 Global’s Michael Lebowitz has made the conclusion that when comparing the dot-com bust to today’s record run-ups in the Dow, S&P 500 and NASDAQ, today’s market may be more overvalued.
“Such perspective allows for a unique quantification, a comparison of valuations and economic activity, to show that today’s P/E ratio might be more overvalued than those observed in 1999.”
Study the below data and ask yourself how much longer valuations will be able to rise, without some of these key numbers improving:
Lebowitz noted that,
“Even though current valuation measures are not as extreme as in 1999, today’s economic underpinnings are not as robust as they were then.”
He concluded that,
“There is little justification for paying such a historically steep premium for what could likely be feeble earnings growth for years to come.”
source: http://www.marketwatch.com/story/stop-this-is-not-like-the-dot-com-bubble-its-much-worse-according-to-this-chart-2017-03-02?mod=MW_story_top_stories
Weak US Market | Strong Gold Market
Our interest lies in what a deflating US market could mean for gold stocks. From a historical standpoint, commodities have had an inverse relationship with US equities. Commodity bull markets tend to erupt during bear markets in US equities and vice versa. It is rare everything goes up together. Check out the latest cycle below, following the collapse in the NASDAQ which opened the door for a multi-year bull market in gold.
HUI – 20 Year Chart
NASDAQ Chart – Adjusted for Inflation
chart source: http://www.macrotrends.net/1320/nasdaq-historical-chart
If US equities begin to rollover, it may initially drag down the broader markets, but investors may look to gold stocks for strength as reflected by their historic performance during downturns.
I’ll leave you with the below table from a recent Goldsilver.com article, that highlights gold’s performance during S&P 500 declines:
