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Are current market cycles similar to the GFC of 2007-2009?

Commentaries & Views

Soaring real estate, rising volatility, surging commodities and slumping stocks - Sound Familiar?

This past week marked the 13th anniversary of the bottom of the Global Financial Crisis (GFC) of 2007-2009. The March 6, 2009 stock market low for the S&P 500 marked a staggering overall value loss of 51.9%.

The GFC of 2007-09 resulted from excessive risk-taking by global financial institutions, which resulted in the bursting of the housing market bubble. This, in turn, led to a vast collapse of mortgage-back securities resulting in a dramatic worldwide financial reset.

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IS HISTORY REPEATING ITSELF?

The following graph shows us that precious metals and energy outperform the stock market as the "Bull" cycle reaches its maturity. The stock market is always the first to lead, the second being the economy, and the third, being the commodity markets. But history has shown that commodity markets can move up substantially as the stock market "Bull" runs out of steam.

The current commodities rally in Gold began August 2021, Crude Oil April 2020, and Wheat in January 2022. Interestingly we started seeing capital outflows in the SPY-SPDR S&P 500 Trust ETF in early January 2022, and the DRN-Direxion Daily Real Estate Bull 3x Shares ETF starting back in late December 2021.

LET"S SEE WHAT HAPPENED TO THE STOCK AND COMMODITY MARKETS IN 2007-2008

SPY - SPDR S&P 500 TRUST ETF

From August 17, 2007 to July 3, 2008: SPDR S&P 500 ETF Trust depreciated -20.12%

The State Street Corporation designed SPY for investors who want a cost-effective and convenient way to invest in the price and yield performance of the S&P 500 Stock Index. According to State Street"s website www.ssga.com, the Benchmark, the S&P 500 Index, comprises selected stocks from five hundred (500) issuers, all of which are listed on national stock exchanges and span over approximately 24 separate industry groups.

DBC – INVESCO DB COMMODITY INDEX TRACING FUND ETF

From August 17 2007 to July 3, 2008: Invesco DB Commodity Index Tracking Fund appreciated +96.81%

Invesco designed DBC for investors who want a cost-effective and convenient way to invest in commodity futures. According to Invesco"s website www.invesco.com, the Index is a rules-based index composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world.

BE ALERT: THE US FEDERAL RESERVE POLICY MEETING IS THIS WEEK!

In February, the inflation rate rose to 7.9% as food and energy costs pushed prices to their highest level in more than 40 years. If we exclude food and energy, core inflation still rose 6.4%, which was the highest since August 1982. Gasoline, groceries, and housing were the most significant contributors to the CPI gain. The consumer price index is the price of a weighted average market basket of consumer goods and services purchased by households.

The FED was expected to raise interest rates by as much as 50 basis points at its policy meeting this week, March 15-16. However, given the recent world events of the Russia – Ukraine war in Europe, the FED may decide to be more cautious and raise rates by only 25 basis points.

HOW WILL RISING INTEREST RATES AFFECT THE STOCK MARKET?

As interest rates rise, the cost of borrowing becomes more expensive. Rising interest rates tend to affect the market immediately, while it may take about 9-12 months for the rest of the economy to see any widespread impact. Higher interest rates are generally negative for stocks, with the exception of the financial sector.

WILL RISING INTEREST RATES BURST OUR HOUSING BUBBLE?

It is too soon to tell exactly what the impact of rising interest rates will be regarding housing. It is worth noting that in a thriving economy, consumers continue buying. However, in our current economy, where the consumers' monthly payment is not keeping up with the price of gasoline and food, it is more likely to experience a leveling off of residential prices or even the risk of a 2007-2009 repeat of price depreciation.

THE POTENTIAL FOR OUTSIZED GAINS IN A BEAR MARKET ARE 7X GREATER THAN A BULL MARKET!

The average bull market lasts 2.7 years. From the March low of 2009, the current bull market has established a new record as the longest-running bull market at 12 years and nine months. The average bear market lasts just under ten months, while a few have lasted for several years. It is worth noting that bear markets tend to fall 7x faster than bull markets go up. Bear markets also reflect elevated levels of volatility and investor emotions which contribute significantly to the velocity of the market drop.

WHAT STRATEGIES CAN HELP YOU NAVIGATE CURRENT MARKET TRENDS?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24 months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe we are seeing the markets beginning to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into metals, commodities, and other safe havens.

IT'S TIME TO GET PREPARED FOR THE COMING STORM; UNDERSTAND HOW TO NAVIGATE THESE TYPES OF MARKETS!

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.