Transcription
Hey everyone, and thanks for jumping back into the equity verse. Today, we're going to talk about the S&P 500 amidst all the geopolitical conflict. If you guys like the content, make sure you subscribe to the channel, give the video a thumbs up, and check out benjamancow.com. Let's go ahead and jump in.
So, for a long time since I started this channel back in 2019, we've talked about how there's three major things that, you know, you have to consider when thinking about investing in stocks, right? One is the labor market, one is inflation, and the other one, which we talk the least about because it is so unpredictable, is geopolitical conflict. Now, I can assure you, I am not a geopolitical conflict expert by any stretch of the imagination. I'm not, I don't claim to be. I think it's very hard to predict what's going to happen. No one truly knows what's going to happen later today. Uh, but it is something that certainly can have implications, especially long-term implications on on the market.
The price of oil continues to go up, and as we've said before, it is the price of oil spiking in a late business cycle environment that starts the beginning of the end of the business cycle. And one of the reasons that I say that we are in the end of a business cycle is because if you were to go look at at the the business cycle chart that we've talked about uh for quite a long period of time, you know, this is the S&P 500 divided by the unemployment rate squared, multiplied by the US inflation rate year-over-year, multiplied by US interest rates normalized by the money supply or M2. You can see that this is, in fact, a late business cycle environment, and how all prior late business cycle environments ended with a recession in the United States, and practically all of them also corresponded to a spike in the price of oil. Now, oil going up in an early business cycle environment uh is generally bullish, but in a late business cycle environment, it's not really a bullish thing because it, it basically um, makes it so that inflation becomes an issue again when it was largely getting somewhat under control. And when you couple that with a labor market that is getting weaker and weaker, that's how the Federal Reserve ultimately gets checkmated.
Now, I mean, not only do you have a an unemployment rate that's rising, you have an inflation rate that's likely going to rise, you have a partial government shutdown, and you have geopolitical conflict going on over in the Middle East. And so, I mean, look guys, markets climb the wall of worry for long periods of time. I've said this forever. Um, bears sound smart, bulls make money, but the bears are sometimes right. And when I, when I think about like how this will likely play out, you know, a lot of times when concessions are made um, you know, with tariffs and whatnot, there's usually been this trade back up, but I have a feeling that the market is getting exhausted from all the deadlines and the and sort of the narrative changes. I think the market's getting exhausted. It doesn't mean it's exhausted just yet. Um, but I do think that that trade that people have relied on for so long will start to fail uh as the year goes on.
Now, I want to talk about a couple of different things here because the stock market is one of the most difficult things to predict with things like Bitcoin. Even though it is difficult to predict short-term moves, it tends to be very cyclical, right? Like it tops in the fourth quarter post-halving years, tends to bottom out about a year later. Um, there's this cyclical nature to it, and there's also a cyclical nature to the stock market in the sense that it likes to bottom approximately every four years. However, figuring out where the top is is a lot harder. Okay, look at 2018. How the stock market put in a high in the early part of 2018 and then swept the high later on before getting a larger drop in Q4. Look at the lead-up into the financial crisis. How there was a high, there was a high right here in um, in 2007. We had a, a pretty large drop back then. The, the drop ended up being about 12%, and then the market rallied back up to a new all-time high, and then we had a major recession. If you look at the dot-com era, same kind of stuff, right? You had sort of a high that was set, and then you rallied back up, and then swept the high for a while, but then ultimately the, the recession came regardless.
So the reason why it's so hard is because a lot of people expect market tops to play out like um, like that, like in a, in a very uh, short period of time. But in general, markets topping is a process, and markets bottoming is an event that happens very, very quickly. And if you don't believe me, I mean, just look at what Bitcoin did, right? Like, I mean, Bitcoin had this top right here in January of 2025 on the new administration taking office. And then all it really did, even though I don't think a lot of people would like to admit this, all it really did after that was sweep the high and then start to collapse. That's like all that really happened after the new administration uh came in in January of 2025, right? You, you had a sweep of the high and then it sold off. And so this was a process, right? That this top was a process that took place over a long period of time. And so the stock market topping process can also take place over a long period of time. You could argue that it already swept the high, but there's always a chance that it could sweep the high again.
Now, for me, as I've said, this is not something that I'm trying to trade. What I typically do, and I, I mentioned this to ITC premium subscribers last year, was to focus more on international funds, focus more on um, energy stocks, which have done really well. Some of the manufacturing stocks have done really well. A lot of people went into this year saying that the ISM was bullish and why that was a good thing for crypto. No, the ISM going up was a good thing for manufacturing stocks, not for risky, frothy assets that are mostly just speculation. And so the, the point here is to say markets do not move in a straight line, right? They, they just don't. And you can have a long-term thesis about a market without figuring out every short-term move in the short term or it like over, over the course of the o of that sort of bare market.
For me right now, when I think about like where the stock market is, I think that the high is either in, or we sweep the high and then we drop. Like, I, I think one of those two outcomes is the most likely. And the reason why I say it is is for a lot of different um, metrics, but one of the, there, there's a couple that you could look at. If you look at the S&P divided by gold, it's only broken down from these levels sort of a couple times throughout history. And the last time this happened was in '08. And, and you can see what happened. And the time before that was in 1973. And if you overlay the S&P 500 onto the chart, what you will, in fact, see is how when the stock market broke down against gold in 1973, that basically corresponded to the top. And when it broke down, when the stock market broke down against gold in 2008, that basically corresponded to the top. So I don't really have a strong reason to believe this time is necessarily different. I look at that and come to the conclusion that the, the, the local high for the stock market is likely in for a while. And if it's not, it would likely just be a sweep of the high, right? And, and sort of some evidence for a sweep of the high could be something like the S&P 500 divided by the money supply, right? I mean, this is a chart we've talked about for a while. I honestly keep expecting this fractal to break, but it hasn't broken yet. And so, until it breaks, it probably just makes sense to follow it. Um, and if you look at how this played out in the '90s and just kind of overlay it to 2000, you know, to this last low, you can see like I don't know every single narrative that corresponded to the drops back then. I know what they were this time. Like the drop, the stock market had in 2023 was when rates were going up. Um, and, and, you know, the 10-year yield spiked pretty high. You know, things were above 5%. In 2025, it was, of course, the tariffs. Who knows what it'll be if we get another rally back up and sweep the highs. Perhaps it'll be some type of concession being made or, you know, major crisis averted, and it, and it makes people think we go back to normal. But the problem is that it doesn't mean that it won't eventually unwind and eventually go back down and sweep the lows from April of 2025.
Now, again, I don't know if we're going to have a sweep of the prior all-time high. It is not something that I'm trading, but I would, I would encourage people to think about if it does happen, it doesn't mean that we aren't in a sort of going into a, a bare market in the midterm year, right? Because it's happened many times before where you have a high and then you sweep the high, like it, it happened in '08, it happened in, in 2000, um, it happened even in 2018, right? So like that kind of stuff can happen. Um, and it should not lead people astray, in my opinion, to sort of fall for the narrative that would be behind a move such as that. It would be a hell of a lot easier, in my opinion, if that doesn't happen. And this just plays out more like what happened uh when the stock market broke down against gold in 1973 or 2008, where it essentially marked the top for the S&P 500, and there was no next sweep of the prior high. In fact, both the stock market dropped and gold dropped, but then gold got to all-time highs well before the stock market did.
So again, this is all about opportunity cost. It's not to say that stocks can't ever go up. It's more so to say that look, there's been better investments out there for a while, and I think that will continue to be the case. I mean, look, the reality is that the S&P 500, whether you like it or not, is down almost 50% against gold over the last few years. And that's even in the major AI boom that we had. If you prefer that I look at this against the NASDAQ, I can do that. And if you look at the NASDAQ against gold, uh, since 2021, the NASDAQ is down 44% against gold. So again, this is all about opportunity cost. It's not to say that it, it's like when Bitcoin was in a bull market. It's not that altcoins couldn't go up. It's just that so what if they did? Bitcoin was going up more, and in corrections, Bitcoin was not dropping nearly as much. Now, the same thing could be said of the stock market relative to gold, or Bitcoin relative to gold. And there's a lot of people that are sort of falling for the narrative that like that Bitcoin is outperforming gold right now. Um, but I would encourage you to sort of zoom out on this chart and see how every midterm year, Bitcoin has some type of small rally against gold um around this time. And historically, it, it hasn't led to anything durable. And the durable change didn't occur until later in the year. So, I think it's most likely that Bitcoin will eventually drop another say 30% against gold from the current levels, maybe about 35% or so to get back to where it was in um, in 2023. You can see that if you look at Bitcoin against silver, right? Bitcoin against silver, it already dropped to where it was back in uh, 2022, right? It already happened. And so I, I think it probably will also happen um, with Bitcoin's valuation against gold as well. It just takes time, you know, for this to ultimately play out.
Again, as geopolitical conflicts go, I don't know what's going to happen. I hope things deescalate. I, I really do. I, I, I hope that um, you know, common sense prevails and that we come to our senses and and we start to see some type of deescalation from what has been happening. But I'm not going to pretend to know what's going to happen. I don't know what's going to happen. You could have an event later today where the markets are up a lot on some type of headline, or they could be down a lot on some type of headline. The point is, is whatever the short-term reaction is, does not likely change the long-term trend of what's happening. You know, whether, and you could argue that if the market goes down, that would actually be more likely to correspond to a low for a while that the market might build off of for, you know, for a few months. If the market goes up, then it would again, it would probably just correspond to a, a either a lower high or a sweep of the prior high. Um, and look, these are, these are my thoughts. I know they're not going to be popular, but look guys, the charts suggest that we are in a late business cycle environment. Okay, that doesn't mean stocks can't ever go up. They can, but according to the business cycle chart, we're in a late business cycle environment. And according to our liquidity risk metric, we are in a, in fact, in a late business cycle environment. No one knows exactly when the crisis is going to occur that causes the business cycle to end. It could be long and drawn out, or it could happen very, very quickly. No one really knows. Um, but I will say this, if geopolitical conflict continues to escalate while the labor market gets weaker and while inflation starts to go back up, the crisis will likely be accelerated in time, right? Like it'll, it'll likely happen earlier than it otherwise would have. So again, it's hard. It's very difficult to time things exactly, but this is the framework that I think makes the most amount of sense, and this is what I'm using to navigate the markets.
If you guys like the content, make sure you subscribe to the channel, give the video a thumbs up, and if you want more insights, you can always check out my website, bjamincowan.com. Thank you guys for tuning in. Subscribe, give the video a thumbs up, and I'll see you guys next time. Bye.