Too early to buy! So say the most pessimistic, confident that markets will continue to fall after the September slump that sent eurozone stocks to new lows in the current bear market. According to them, we have not yet reached the “capitulation” of the markets, that is, the moment when investors, in a panic, sell their shares at any price, which generally marks the end of a bear market. However, two factors make such a situation unlikely this time around. Here’s why.
Surrender assumes that investor fears are not at their peak. Proponents of this idea rightly claim that bear markets occur in an environment where investors move away from stocks and into safe havens such as bonds, gold, and cash. Outflows from equity funds are increasing as all hope of a market recovery vanishes. It’s surrender!
The end of bear markets usually So, but it is not not always the case. This should not be the case today for two reasons: The first is that for many investors around the world, the decline seen this year does not constitute a bear market. The second is that the usual safe havens do not look that safe.
US dollar stocks fell as low as -24.4%, this is a small bear market. Those in the Eurozone posted a similar low at -24.8% in EUR. The differences between the sectors mean that Japan, the United Kingdom, Canada and Australia are not currently in a bear market. Without a sharp drop in prices, why would investors act so radically?
Commentators believe the relatively weak outflows from equity funds since April (when investors withdrew around €65bn) are evidence that a panic sell-off is imminent.
But let’s take the usual safe havens, such as bonds. Its outflows have outpaced equity inflows so far, which isn’t surprising: Since global equities peaked in January, the Bloomberg World Composite Bond Index, which tracks market developments in government and corporate debt, has posted a 9.2% decline, ultimately not far from that of As shares fell by 12.9%. What about long-term bonds? Over the same period, 10-year OLO fell by 19.2% and bonds by 17.6%. Many believe that interest rates will continue to rise – exacerbating losses in the bond market. So why switch from stocks to bonds?
Inflation also erodes the value of interest earned on bonds. The same goes for cash. Inflation in the Eurozone and Belgium were 10.0% and 11.3% respectively, eroding the value of cash. Moreover, banks do not need to raise interest rates to attract new deposits because they are already overwhelmed with liquidity. As a result, even so-called “high-yield” US savings accounts earn less than 3% post-inflation. Why sell stocks to lock in a loss?
After shining at the beginning of March, the price of gold, which is supposed to provide a hedge against inflation, fell by 11.7% – well above the price of equities by 2.9%.
What about cryptocurrencies? Bitcoin fell 72.5% in US dollar terms from its November 2021 high to its September 21 low, hurting its reputation as a digital safe haven.
With high prices and borrowing rates, real estate offers little security and little liquidity – making this investment even riskier.
Therefore, surrender, as it is generally understood, is not for today. Remember: the stock market seeks to con most investors out of as much money as possible and for as long as possible. That is why I like to call him “the great humiliator.” Starting a new bullish cycle when everyone expects the markets to capitulate is exactly the kind of trick it will play on investors. At a time, like today, when pessimism and fear prevail, it is appropriate to show optimism and ambition.