Capitulation Is How Bear Markets End, But Probably Not This One
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Pessimists claim it’s too soon to buy, that October and November’s stock market rally was yet another false dawn. Doomsayers see significant downside until we hit “capitulation”—a famous term meaning heavy panic selling. Capitulation is how bear markets commonly end. But several key factors make that ending unlikely this time. Let me show you.

The capitulation thesis stems from the notion investors aren’t fearful enough for stocks to bottom. History shows violent selling often characterizes bottoms, as panicked investors purge stocks preferring liquid “safe havens” like bonds, gold and cash. Outflows from stock mutual funds and exchange-traded funds surge, as demoralized investors’ last gasps of hope vanish—capitulation!

Yes, bear markets usually end in capitulation, though that is only crystal clear in hindsight. And, clearly we haven’t seen capitulation so far. Despite many sentiment measures like Bank of America’s global fund manager survey hitting extreme lows in October, fund flows have been muted. The week of October 7—days before this bear market’s lowest point so far—US investors pulled an estimated $25.9 billion from equity mutual funds and ETFs. But consider: The week of March 27, 2020, as stocks hit their COVID-lockdown low, US investors dumped $41.8 billion in stock funds. Pessimists conclude necessary panic selling looms.

However, rote reliance on history is always a mistake. History is quite useful in analyzing probabilities, but it isn’t a roadmap or destiny. Yes, bear markets commonly end in capitulation, but not always. Some—like 1966 and 1982—prove that.

I suspect this will become another example. For one, global stocks’ peak-to-trough drop in dollars thus far is -26.1%—a minor bear market historically. Meanwhile, Fed hikes led to the dollar surging. That caused what I call the Dollarization of Terror. It maximizes the fear and decline for dollar-denominated equity investors but minimizes it for others. In euros, British pounds and Japanese yen, world stocks haven’t even hit bear market levels. And sector make-up means major indexes in Canada, Britain, Australia and Japan are down only mildly. Without the extremes normally driving panic, why would these investors freak out? That is one reason we won’t see capitulation this time.

Another? “Safe havens” look perilous. Consider bonds, an all-time favorite one. Their year-to-date outflows dwarf stocks’. Little wonder, when the Bloomberg Global Aggregate Bond Index, a gauge of corporate and government debt from 24 nations, is down -22% from March 2020’s high—mirroring world stocks’ decline since last January. US Treasurys? The ICE BofA US Treasury Index is down -19% since March 2020 highs, including interest and price movement. Long-term Treasurys are even worse—down -41% since their most recent high. Rising rates also hit intermediate-term Treasury Inflation-Protected Securities, off -17% from this past March’s high. Most people are convinced rates must rise higher for longer now—meaning bond prices would fall further. Why sell stocks to buy bonds now? Plus, inflation—widely feared everywhere—would erode bond interest payments’ value.

That applies to cash also. Why pile into cash when it pays little and will be worth far less soon if today’s inflation rates persist? Even if inflation has peaked, savings yields won’t offset its eroding effects. Banks, flush with deposits, don’t need to lure even more with higher rates. According to Bankrate, the average US savings account pays nearly nothing: 0.16% yield as of November 2. High-yield savings accounts hover around 3.0% or less. Both are severely negative after inflation. That means exiting stocks to lock in a certain loss.

Gold, maybe the most famous “safe haven” of all, should be faring great if myths about it hedging inflation, bear markets and chaos were true. But after shining through early March, gold has tarnished, dropping over -20%—nearly doubling global stocks’ -10.7% over the same span.

Crypto? Bitcoin’s -73% drop from November 2021’s high through September 21’s low killed talk of digital safe havens.  It may or may not rise spectacularly, but it is speculative, not a safe haven.

Real estate offers little safety, given mortgage rates’ rise has hit demand hard in an overall high-price environment. Both homebuilders and would-be buyers expect lower housing prices ahead. Regardless, real estate lacks liquidity—adding more risk.

With nowhere to run and hide, we probably won’t see classic capitulation this time. As I have told you, the stock market—The Great Humiliator—wants to fool as many as possible … for as long as possible … for as much money as possible. It has certainly done a good job on me this year. But a new bull market stealthily starting while many await capitulation would fool almost everyone now. Maybe the rally since October means it has already begun.

This period reminds me most of 1966’s bear market—which, as I noted earlier, ended without capitulation. Similarly, it featured fear of capitulation, big Fed rate hikes to fight inflation, a costly regional war, social unrest, no global recession (despite endless belief in one) and a US midterm election where the democrats held both Congressional chambers and the Presidency. Against that backdrop, the classic Midterm Miracle—which I wrote of in July—performed perfectly. A stealth bull market started in Q4 1966 as political uncertainty fell. The S&P 500 returned 21% in its first three quarters.Of course, no one can be sure now will look like then. But when so many are pessimistic and fearful, it is time to be bravely optimistic.

Ken Fisher, the founder, Executive Chairman and co-CIO of Fisher Investments, authored 11 books and is a widely published global investment columnist. For more, see Ken’s full bio, here

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