12/18/23 08:43 AM EST

Floor Receding Underneath Growth Facade

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.

Dr. Lacy Hunt, a voice we hold in high regard, often points to those moments in history where the economy, much like a mirage, presents a façade of growth before the ground falls away into recession. Case in point: Q3 of 1981. Amid Volcker's inflation wrestling match, the economy surged by 4.9%, a figure that echoes our recent Q3 of 2023. Yet, the recession call was made, beginning in July 1981, ushering in the most bruising downturn of the postwar period, persisting until December 1982.

During that historical phase, the S&P 500 plunged nearly -30% from January 1981 to August 1982, despite a 15% rally in Q3 of '81. Meanwhile, the 10-year Treasury yield peaked at 11.36% in September 1981, then dropped 410 basis points by March 1983. Gold, in lockstep with equities, plummeted -57% from January '81 before clawing back a 42% rally starting in June '82.

Rewinding further to 2007, gold and the S&P 500 climbed in tandem, only for gold to tumble -33.2% from March to November 2008, mirroring the S&P's -34% freefall. Post-sell-off, gold embarked on a legendary ascent through the financial crisis and recession, reaffirming its rebound prowess and status as a safe haven. This historical performance suggests gold's dual role: a liquid asset in market routs and a sanctuary in the aftermath.

This particular crocodile chart should continue to head wider for a while.

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