Why 'capitulation' won't end the bear market this time around

It is unlikely there will be a mass investor exodus from stocks to the now not-so-safe havens of bonds, gold and cash

The peak-to-trough drop in stocks so far is 25 per cent, which is considered a minor bear market. Alamy
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How much more will global stocks fall? As world stocks purge June’s lows, that question is vexing investors worldwide.

Pundits overwhelmingly envision much more downside until we hit “capitulation” — a famous phrase meaning cascading panic selling.

Yes, capitulation is the most common end to bear markets. But not always. One big factor makes that ending unlikely now. Let me explain why.

The capitulation thesis implies investors aren’t fearful enough.

Usually, bear market bottoms terminate with violent selling that relentlessly yanks money from stocks in favour of “safe havens” such as bonds, gold and cash.

Stock fund outflows surge as demoralised investors’ last hopes vanish — the moment of capitulation.

That is the typical process, although capitulation is only ever clear in hindsight. And, yes, we haven’t seen that this year — yet. After all, the peak-to-trough drop in stocks so far is 26 per cent, which is considered a minor bear market.

Despite many sentiment surveys, including the American Association of Individual Investors Bull/Bear study, and global fund manager surveys hitting extreme lows lately, fund outflows have been muted.

By the end of September, US investors had pulled $29.4 billion from stock funds. Sounds high? Consider: the week of March 27, 2020, as stocks hit their Covid-19 lockdown low, US investors dumped $41.8bn in stock funds. Pessimists conclude panic selling awaits us.

But rote reliance on historical norms is always a mistake. Average isn’t always. History is very useful in analysing a range of probabilities, but it isn’t a road map or destiny. It doesn’t show that if A happens, then B always follows.

Potential likelihoods are just a start. Then you compare current specifics with history’s specifics. That is where the “no capitulation yet” thesis goes wacky.

A handful of past bear markets, including those in 1966 and 1982, illustrate that they don’t always cease in capitulation — ending without panic selling.

Why does now look like another example? When the usual “safe havens” don’t seem safe, dumping stocks for things that also seem pretty risky is pointless. That is largely the situation in 2022.

Consider bonds. Most global investors target US Treasuries as a haven. Yet the ICE BofA US Treasury Index is down 17.9 per cent from August 2020 highs, while long-dated Treasuries have plummeted 40 per cent — as bad or worse than stocks.

Beyond the US, Bloomberg’s Global Aggregate Bond Index, a 24-nation gauge of corporate and government debt, is down 24.7 per cent from January 2021’s high, nearly matching the decline in global equities.

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Watch: US Federal Reserve chief warns of 'pain' in reducing inflation

With most people convinced that interest rates must rise from here, meaning prices would fall, it is no shock that year-to-date bond fund outflows dwarf stock outflows.

Of course, inflation fear is ubiquitous, which would eat into the value of bonds.

That also applies to cash. Why pile into cash when it pays little and will be worth 10 per cent less next year?

Because banks are overly flush with deposits, they don’t need to lure even more with higher rates.

Most UAE savings accounts yield between zero and 2 per cent, according to personal finance website Yallacompare.

In the US, the average is 0.17 per cent and high-yield savings accounts hover around 2 per cent. Those rates are staunchly negative via inflation. That means exiting stocks, where returns could be negative ahead — or not — for an assured real loss.

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For years, I have called the stock market 'The Great Humiliator' — it wants to fool as many as possible … for as long as possible … for as much money as possible
Ken Fisher, founder, executive chair and co-chief investment officer of Fisher Investments

Gold, arguably history’s most famous “safe haven” of all, would be glowing now if myths about it hedging inflation, bear markets and chaos were true.

But, as The National recently wrote, it isn’t. After shining through early March, gold has fallen 19.9 per cent, far exceeding the 13.6 per cent drop in global stocks over the same time span.

Think crypto is the new gold, as many argued pre-2022? Bitcoin’s 71 per cent plunge from November 2021 ensures that crypto is no safe haven.

Feel like bolting? OK! But with basically nowhere safe, liquid and easy to run to and hide, we probably won’t see classic capitulation this time — no mass exodus from stocks to what are now not-so-safe havens.

It should look more like 1966 and 1982.

For years, I have called the stock market “The Great Humiliator” — it wants to fool as many as possible … for as long as possible … for as much money as possible.

A new bull market stealthily starting as most await capitulation would do just that. Of course, no one can ever be sure. But when most are pessimistic and fearful, it is a time to be optimistic and greedy. That is today.

Ken Fisher is the founder, executive chair and co-chief investment officer of Fisher Investments, a global investment adviser with $160 billion of assets under management

Updated: October 06, 2022, 5:47 AM
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