Don’t wait for stock market capitulation – because it isn’t coming

IT IS too soon to buy, say pessimists. Markets will plunge to new lows, having climbed through November, they reason.

These same pessimists also dismiss the autumn rally as yet another false dawn, claiming we have not hit capitulation – a famous term describing the panic-selling freefall that commonly ends bear markets.

Yet, several key factors make that unlikely this time. Let me show you why.

The capitulation thesis implies investors are not fearful enough. Adherents argue that bear markets typically bottom amid violent selling as investors ditch stocks and rush to safe havens such as bonds, gold and cash. Stock fund outflows surge as demoralised investors’ last gasps of hope vanish.

Indeed, that is typical. But capitulation is only ever clear in hindsight. And, yes, we have not seen it up to now. World stocks’ peak-to-trough drop is 22 per cent in Singapore dollars and 26.1 per cent in US dollars – both historically minor bear markets. That holds for eurozone stocks’ 24.8 per cent drop in euros.

Meanwhile, the United States Federal Reserve rate hikes have led to a surge in the US dollar, causing what I call the dollarisation of terror: Fear and decline is maximised for US dollar-denominated investors but minimised for others. In euros, pounds and yen, world stocks have not even hit bear market levels. And particularly strong sector make-up means major indices in Canada, Britain, Australia and Japan are down only mildly in their local currencies. Without an extreme market, why panic?

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Pessimists cite relatively low global equity fund outflows since April – when investors pulled about S$92 billion – as proof panic-selling loomed. Even so, some bear markets did not end in capitulation such as in 1966 and 1982. The current situation looks like another example. Why? The usual safe havens do not seem safe.

Take bonds. Their 2022 outflows dwarf that of stocks’. Little wonder, when the Bloomberg Global Aggregate Bond Index – a gauge of corporate and government debt – is down 18.6 per cent from July 2020 highs, trailing world stocks’ 15.6 per cent since last January’s peak. Long-term bonds? While FTSE’s gauge of 7-10 year Singapore Government Securities is down 7.6 per cent this year, that is small globally. US Treasuries have fallen 14.5 per cent this year in US dollar terms. UK gilts are down 13.8 per cent in pounds. German bunds are down 15 per cent in euros.

Most investors expect rates to rise further ahead, dragging bond prices down even more. I doubt long rates rise materially from here – but if that is your expectation, why swop stocks for bonds? Plus, inflation remains elevated everywhere – despite some easing in Singapore and globally – eroding bond interest payments’ value.

That applies to cash, too. 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 – as I explored last month – savings yields will not offset its eroding effects. Despite some increases in rates on some accounts, basic bank savings accounts in Singapore yield less than 2 per cent – which is lower than the inflation rate. America’s savings accounts pay almost nothing. Why exit stocks to lock in a real loss?

Gold – perhaps the most famous safe haven of all – should be faring wonderfully if myths about it hedging inflation, bear markets and chaos were true. But after shining in early March, gold has tarnished, down 13.6 per cent and far exceeding global stocks’ 3.1 per cent drop over the same span.

Crypto? Major cryptocurrency exchange collapses – and subsequent calls for greater due diligence, in Singapore and around the world – killed all talk of digital havens. Bitcoin plunged 76.6 per cent in US dollar terms from November 2021’s high till November 2022’s low.

Real estate offers little safety, given mortgage rates’ rise has hit demand globally in an overall high-price environment. Singapore’s property prices are still rising, but global real estate sales and prices are falling broadly – with many fearing steeper declines ahead. Regardless of whether those fears materialise, real estate’s lack of liquidity adds more risk.

With nowhere to run and hide, we probably will not see classic capitulation this time. As I wrote in October, 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.

Of course, no one can be sure where stocks wiggle in the short term. But when so many are pessimistic and fearful, it is time to be optimistic and greedy – and that time is now.

The writer is the founder, executive chairman and co-chief investment officer of Fisher Investments, an independent investment adviser serving both individual and institutional investors globally.