The last two recessions were devastating for the S&P 500.
The dot-com bubble during March 2000 to October 2002 saw the Index drop -49%, while the Global Credit Crisis from October 2007 to March 2009 saw an even greater drop of -57%.
Since then, the S&P 500 has been on fire, gaining 250% and breaking record highs almost daily.
As the old adage goes, “the bigger they are, the harder they fall”. If the S&P loses 57% in the next market crash, that would represent $10 trillion in value lost, and would take the Index down to 1,077.
As the more cyclical sectors begin to decline, portfolio managers will begin to reallocate capital to more attractive sectors.
In the current bull market, the S&P is up 247%, while gold stocks are down -30%. If the pattern holds, the succeeding bear market in the S&P will trigger a major gold rally, which we predict will continue into the next S&P bull.
Portfolio managers will look for undervalued stocks in sectors considered safe havens. Gold stocks check all the boxes and a surge of capital will soon find its way into them.
Using the materials sector as proxy to gold stocks, we saw in each of the last two bears the weighting of the sector increase. The total value drop was also less in terms of percentage compared to the overall market. We calculate inflows of $206 billion in 2000-2002, and $270 billion in 2007-2009.
If the coming drop follows that of the recent recession, we can expect an inflow of at least $440 billion into gold stocks. That is a lot of money on the sidelines. And when it begins to pour in, gold stocks will explode.