11/09/23 09:17 AM EST

Brisk Upturns Historically Precede Recessions

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Today’s bonus chart strikingly resembles a crocodile that’s had a mishap with its lower jaw. It contrasts gold, shown in blue, with the inverted 10-year real yield. Typically, there's an inverse relationship between real yields and gold, so the current divergence prompts the question: Why?

Dr. Lacy Hunt, one of our favorites, often cites historical precedents where the economy experienced a brisk upturn just before tumbling into recession. Take Q3 of 1981, for example, when Paul Volcker was grappling with inflation. The economy expanded at a robust 4.9%—mirroring the growth rate reported for Q3 of 2023. Yet, the National Bureau of Economic Research later pinpointed the recession's onset in July of 1981. That recession turned out to be the most severe of the postwar era, enduring until December of 1982.

Here's how Gold and SP500 behaved during that stretch. Between January 1981 and August 1982, the S&P 500 fell by nearly -30%, even though it rallied by over 15% in Q3 of 1981. In September 1981, the 10-year Treasury yield hit 11.36%, only to drop 410 basis points to 7.26% by March 1983. In a similar vein, gold, which declined by -57% from January 1981, aligned with the equities market downturn and only began a 42% rebound in June of 1982, again in sync with equities.

It’s also instructive to recall that gold performed strongly in 2007 alongside the S&P 500. Yet, from March to November of 2008, gold fell by -33.2%, closely shadowing the -34% drop of the S&P 500. Following this sell-off, gold embarked on a historic rally as America navigated through the Great Financial Crisis and the subsequent recession. This serves as a reminder not to underestimate gold’s potential to be liquidated during sharp equity sell-offs, only to later reclaim its status as a safe-haven asset.

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