Brief Thoughts On Financial Markets

I rarely discuss financial markets these days. Although I pay attention, it’s not in the obsessive manner I did a decade ago. I mainly keep my eyes out for potential big macro turning points, and if I see something interesting in that regard, I try to share it with readers. This means I might not mention markets for months at a time, if not longer. I think the setup right now is unique enough to provide a few thoughts.

The only chart or ratio I really pay attention to is SPY/GLD, which is a proxy for the S&P 500 priced in gold. In my view, a real equity bull market is characterized by equities rising and hitting new highs in gold terms, not just in nominal terms.

Let’s take a longer-term look at this ratio.

(Click on image to enlarge)

Although equities bottomed in nominal terms back in early 2009, the post-financial crisis low for equities in gold terms didn’t occur until the second half of 2011. From there, stocks in real terms soared for seven years in an extraordinary and historic bull market. Then, in September 2018, something changed.

Equities suddenly stopped outperforming gold, with the ratio topping out just under 2.60. Gold even outperformed the tech-heavy Nasdaq since then, though not by nearly as much. Point is, if you can just own a shiny rock and outperform all the broad stock indices then what you’re witnessing isn’t really an equity bull market, but something else. Something much bigger.

Throughout 2019, I paid close attention to the SPY/GLD ratio and felt the 1.95-2.0 area was important. My sense was when this level broke it would represent some sort of watershed moment. This level broke in early 2020 as covid-19 spread around the world.

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