Investing.com — Gavekal Research warned investors in a note Tuesday that a bear market in the S&P 500 could be on the horizon.
The firm’s analysis, which examines the relationship between the S&P 500 and the price of gold, suggests that the market is at a critical juncture.
According to Gavekal, assets can be viewed as having value either because they are “useful” or “scarce,” with the S&P 500 representing efficiency value and gold symbolizing scarcity.
Historically, the S&P 500 has outperformed gold by around 1.3% annually, reflecting growing economic efficiency.
However, this relationship fluctuates, and when the ratio of the S&P 500 to gold drops below its seven-year moving average, it often signals the beginning of a bear market, according to Gavekal.
Currently, Gavekal’s efficiency-to-scarcity ratio sits precariously at its seven-year moving average, raising concerns about a potential downturn.
“We will soon see whether or not we are in a new structural bear market,” the analysts note.
They emphasize that similar market signals have preceded previous bear markets, which have resulted in significant declines.
Despite the warning signs, Gavekal points out that the exact reasons behind such market shifts are often unclear at the time they occur. While rising inflation or interest rate misalignments could be contributing factors, the firm admits that they have “generally struggled to say why” bear markets unfold.
The key takeaway, according to Gavekal, is to stay vigilant.
“It is often only at the end of a bear market that I understand why it took place,” said Gavekal. “At such moments of illumination, it is usually the case that one should be buying rather than selling equities. Thus, the goal of this paper is to warn that a bear market may be imminent.”
