There are investors still sitting on the sidelines in cash waiting for the day of “Capitulation”. Capitulation is that time when retail investors just give up and sell all their stocks, forsaking any stock market gains. Sometimes it is a one-day affair; sometimes the sell-off takes several days. And sometimes it occurs over such a long period of time that it isn’t obvious until after the fact, when we can look back at historical data and examine the trends. Capitulation means that the market has bottomed. Last week I shared this:
“On Monday, June 14, 1986, the Dow Jones average dropped 45.75 points in one day, setting a record. It recovered 36 points on Tuesday to 1,874. That was the month in which I licensed to be a stockbroker, and so at the time I was cold calling to build my book of clients. I made one notable call to a prospect who had sold to cash. He claimed he would open an account with me, but he refused to invest until the DOW hit 1,300. We spoke several times, and I gave him dozens of reasons to invest immediately. He absolutely insisted on holding out for 1,300. I quit calling and do not know if he ever invested. But I do know this: the DOW never fell to 1,300. Instead, for the last 35 years it has soared to over 30,000! Even on Black Monday, when the market sold off a record 22% in one day, the DOW never dropped all the way down to 1,300.”
Beginning in November of last year, the market has trended downward consistently for the last forty weeks. Has this been a rolling capitulation? Annuity sales – which are primarily made when people are afraid of running out of money – are setting new records. This would seem to indicate retail investors have given up on the stock market.1 Could this be a rolling capitulation that has lasted several months?
Are those investors sitting in cash, like the guy who was waiting for DOW 1,300, missed a sliding multiple-week capitulation? Have we seen the bottom in the market? Is the capitulation behind us?
Are we on the way up?
I believe it is very possible. Over the course of July, our clients have seen their account values increase approximately 20% from the end of June. We have been patiently waiting out this slump since October 2021. With this pivot, I am guardedly optimistic we are on our way to new highs.
Edward Renshaw, Professor of Economics at the University of New York at Albany, did a study on the 42 times in which the stock market sold off 5% – 40% between 1872 and 1990. His study found that markets recovered about 1/3 of their value in the first three months after hitting the bottom, and then took up to 12 months to recover their previous highs. Of the 42 market drops analyzed, 29 occurred during recessions or depressions and 13 during times of economic stability. Recoveries were more rapid during good economic times.2
Even though the economy is experiencing inflation, the economics are not like they were in the Great Recession of 2007-2009. During that time, unemployment was up over 10% and over two million homes were foreclosed upon during 2008 alone. Today, unemployment stands at less than 4%, and the banks have all passed their stress tests. It seems like we are in what Renshaw would have classified as “good economic times”, in which the recovery has the potential to be rapid.
The risk today is being out of the market, like the guy who was waiting for 1,300 on the DOW.
Notes:
1. “Limra: Second Quarter Annuity Sales Shatter Record Set during the Great Recession.” LIMRA, July 7, 2022. https://www.limra.com/en/newsroom/news-releases/2022/limra-second-quarter-annuity-sales-shatter-record-set-during-the-great-recession/.
2. Renshaw, Edward F. “Stock Market Panics: A Test of the Efficient Market Hypothesis.” Financial Analysts Journal 40, no. 3 (1984): 48–51. http://www.jstor.org/stable/4478745.
