Where to Hide in an S&P Bear Market?

Where to Hide in an S&P Bear Market?

Where to Hide in an S&P Bear Market?

Are you concerned that the major stock indices may finally correct, leading to the next equity bear market? That’s your call. But one thing is fairly certain based on history; when the next bear market in equities begins, gold stocks will rise.

Below is a chart put together by Palisade Global. The blue represents the S&P500 in bull mode and the red represents bear markets. The left scale measures the percentage move in the S&Ps. The black line is the BGMI, a gold stock index, which is measured in percentage terms on the right scale.

Chart 1

When the S&P inevitably corrects, will gold stocks fall too? Many gold investors think that a stock market crash will also drag down the gold stocks but the above chart dispels such a theory. In fact, the number one determining factor as to whether a stock market crash will take the gold stocks up or down is the performance of the gold stocks in the years leading up to the market crash. It is actually the performance of gold stocks during an equity bull market that seems to dictate the performance of gold stocks during an equity bear market.

In the following table, the column under Market is the condition of the S&P500 at that time, the Gain column provides the percentage gain or loss during the Time Frame on the left and the final column gives you the percentage gain or loss in gold stocks during the same period.

Table 1

When gold stocks remain stagnant or drop during an S&P bull market, gold stocks have performed positively in the subsequent equity bear market. However, if gold stocks rose along with the equity bull, they dropped during the equity bear market.

In the May 1970 to January 1973 equity bull market, the S&P500 gained 65% while gold stocks only returned 11%. The equity bear market that followed was triggered by overwhelming public debt, inflation and an OPEC oil embargo. The S&P dropped -48% while gold stocks gained 180%.

The next time gold stocks dropped during a bull market was December 1987 to March 2000, when the S&P500 gained 568% while gold stocks lost -60%. The following equity bear market was the devastating dot-com bubble, where the S&Ps dropped -49% but also triggered a fantastic gold rally. During the equity bear, the BGMI returned 28% and the rally continued into the next equity bull market. Gold stocks gained 343% over the full market cycle.

In the current bull market, the S&P is up 247%, while gold stocks are down -30%. If the pattern holds, the next bear market in the S&Ps should trigger a major gold rally. So, if you expect a stock market bear, history says you should consider hiding out in gold stocks. Of course, you should always seek the advice of your investment advisor before making these decisions.

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