Earlier this month, the S&P and gold both collapsed on the same trading day, which is extremely rare.
The top-left chart shows that in the past 20 years, the only times gold was down more than 3%
while the S&P is down more than 5% was last week and back in 2008. Such extreme market
action is usually indicative of forced liquidation. The top-right chart shows that typically this is
also a sign of risk-parity drawdowns and liquidation. Capitulation is visible, but as we saw in
2008, asset markets can keep falling until the narrative changes.

Historical black swan events suggest markets are now in “show me” mode and will wait for
the news to turn on the underlying event. The bottom-left chart shows that Russia’s default on
13th Aug 1998 led to the LTCM blow-up, with the market only bottoming shortly after the Fed
bailout announced on 23rd Sep 1998. Similarly, the market crashed when Saddam Hussein
invaded Kuwait on 2nd Aug 1990, with a sustained rally only occurring after the start of operation
Desert Storm on 16th Jan 1991. The 9/11 attack is a trickier comparison as there wasn’t an
obvious sign to signal reduced terrorism risks, with the market eventually bottoming in October
2002. This suggests the infection curves remain key (last chart). So far the US infection curve
looks alarming, more like Hubei than China-ex Hubei. A flattening of the US infection curve is
necessary, but perhaps not sufficient, to eventually shift the market narrative.

Source: Bloomberg, Macrobond and Variant Perception