February 9, 2023 7:48 AM

Buffett Indicator, investor sentiment: a market crash is imminent. Are there any good stocks to buy?

A market crash is starting to look imminent. The famous Warren Buffett Indicator is hitting levels not seen since the start of the millennium during the height of the dotcom bubble, and a Bank of America survey is showing 98% of investors think the market is currently overvalued. Where does one invest for growth in the face of such negative sentiment backed up by telling fundamental data?

/ Published 2 years ago

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Last week’s big tech selloff could be a sign of things to come. The post-outbreak market recovery has pushed many stocks to exceptionally inflated values, pulling market indexes to record highs despite entire struggling sectors dragging behind.

Market indexes defying global economic contraction

Domestically, things have been a little more subdued, with the S&P/TSX Composite index currently hovering just under 10% down on February highs. However, abroad, things are a little different, with the S&P 500 closing last week at 3426.96, just above February highs of 3393.52. The Wilshire 5000 Total Market Index is also still sitting just a tad over 250pts above the February high of 34616.78, closing last week at 34970.27. And this is in spite of the fact that GDP is shrinking dramatically.

OECD Forecasts double-digit GDP contraction for many major economies

According to OECD Forecasts, global GDP is expected to contract by 7.5-9.3% this year. While countries like Korea—who handled the pandemic well and escaped with a relatively robust economy—are only expected to contract by 1.2-2.5%, many countries are facing a much more dire situation. For many, the health crisis has delivered such a large blow that, especially throughout the Euro area, double-digit contractions are being expected.

World Bank says COVID to cause the worst recession since WWII

The World Bank forecasts paint a similarly disastrous picture, predicting that COVID-19 will plunge us into the worst recession since WWII. Their predictions estimate that advanced economies will shrink by 7%, with per capita incomes to shrink by 3.6% globally.  

Warren Buffet Indicator is pointing towards a market crash

The Warren Buffett indicator takes the Wilshire 5000 index and divides it by annual GDP. This provides a quick snapshot of the market’s total current value with respect to the current economic realities.

A ‘healthy’ ratio is approximately 1, indicating that stock prices are largely inline with the economic conditions being faced by the underlying companies. If the ratio is much below one, it indicates that stocks are generally underpriced. And vice versa.

The ratio is currently sitting at around 1.6. This ratio has not been seen since just before the dotcom bubble burst back at the start of the millennium.

Investor sentiment is also pointing to an overvalued market

While a little quick math is certainly convenient, it doesn’t mean anything if investor sentiment doesn’t align with the results. An overvalued market is only going to crash if investors believe it’s overvalued. If there’s an infinite supply of greater-fools, then there’s not going to be a crash.

But it seems investor sentiment is now coming into line with the technically overvalued market, with a recent Bank of America survey finding that 98% of investors believe that markets are currently overvalued.

With such overwhelming negative sentiment sitting on top of such an overvalued market, the resulting crash could be spectacular.

Will investors flock to gold?

Gold has already proven itself throughout the pandemic, breaking through the $2000 mark before settling back down finding support above US$1930/ounce.

This is exactly the level predicted by Thomas Kaplan—the man who predicted the sharp rise in the price of gold following the Great Recession—back in May of last year. Prior to the crisis, he was predicting that, once gold had hit the US$1900/ounce level, it would move relatively quickly to US$3000-5000/ounce. He believed that these price levels were fundamentally justified back then, with his prediction being that the move to these levels would take place over a time span of years. This will be accelerated by COVID-19 and a stock market crash could cause the rise to be explosive.

Big bank analysts are getting behind similar predictions, too, even if more subdued than Kaplan’s typical bullish outlook for gold. Bank of America Merrill Lynch is now expecting gold to hit US$3,000/ounce by 2022. Citigroup is a little more conservative in their estimates, though, but still expect to see at least US$2,300/ounce before the middle of next year.

If a market crash eventuates, expect all current forecasts and expectations to be thrown out the window as the price of the precious metal explodes.

Is now the time to buy gold mining stocks?

Buffett’s notorious move towards gold mining is a good indicator for where investors should be moving their money in the current market circumstances. With such a strong outlook for gold, these stocks are looking like one of the few safe-havens available to investors looking to find growth in an overinflated market on the verge of a possible crash.

Investing willy-nilly is not the way forward, however, and investors should be looking to invest in either active, established mining operations, or junior miners with proven prospecting projects. More speculative projects with unknown reserves, whilst potentially offering the biggest returns, are maybe too risky at the moment. Raising capital for unknown projects that are still at the ‘bit-of-a-gamble’ stage could become highly problematic in a flailing economy, even if gold starts heading towards stratospheric prices.

Rockridge Resources is a good pick

Rockridge Resources Ltd. (TSX.V: ROCK) is the perfect example of where one should be looking to invest at this time. With reserves on their flagship Raney Gold Project already being proven only months ago, this junior miner is going to have a lot less trouble if markets begin tumbling.

Currently sitting at C$0.19 a share, slightly below YTD highs of just over C$0.20, it’s still highly undervalued at the moment, despite the market’s post-COVID rally. The announcement of high-grade findings, hitting intercepts as high as 28g/t gold at the Raney site took place right in the midst of the health-crisis and is still not reflected in Rockridge’s price which seems to have just merely recovered to pre-COVID levels.

(Featured image by Markus Spiske via Pexels)

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