The TSX fell 16.2 per cent from March’s peak to July’s low in Canadian dollars.Frank Gunn/The Canadian Press
Boo! Halloween approaches fast. And markets look comparably ghostly and ghastly. Both world stocks, bogged in a bear market, and the TSX flounder near summertime lows. Consensus opinions fear worse. “Capitulation” – that cascading panic-selling common as bear markets end – hasn’t come.
But two dastardly demons make that ending unlikely. The first is what I call “the dollarization of terror.” Second, capitulation’s typical “safe havens” became unsafe. Let me show you.
The capitulation thesis implies investors aren’t fearful enough. Usually bear market bottoms end with terrorized selling, yanking money from stocks to seek havens such as bonds, gold and cash. Stock fund outflows surge as panicked investors’ last hopes vanish – the moment of capitulation.
While bear markets most commonly end that way, a handful – including 1966 and 1982 – prove it doesn’t always happen. (Actually, this year’s reminds me greatly of 1966.) It shouldn’t this time. Why? The traditional havens seem goblin-like themselves. Nowhere to run – or hide.
World stocks’ peak-to-trough decline in U.S. dollars is minus 26.1 per cent – a minor bear market historically. But the U.S. Federal Reserve interest rate hikes led to the greenback surging, causing the “dollarization of terror.” It mutes global stocks’ declines in non-greenbacks. In Canadian dollars, world stocks’ lows were only minus 21.6 per cent, barely a bear. In euros, British pounds and Japanese yen, the lows haven’t hit bear market levels, merely minus 16.9 per cent, minus 15.3 per cent and minus 14.1 per cent, respectively. Without the extremes normally driving panic, why expect non-U.S. dollar investors to panic?
Country and sector make up matters, too. Take Canada. The TSX fell 16.2 per cent from March’s peak to July’s low in Canadian dollars – a subbear market-sized drop. Partly that comes from your three biggest sectors doing better. Since March’s high, Canada’s heavy-hitting financials are down 15.4 per cent. Energy is down just 2.2 per cent (and actually up 26.1 per cent year-to-date). Industrials? down 7.9 per cent. Hence, scant Canadian investor freak-out.
Pessimists point to relatively low global equity market fund outflows since April, when investors withdrew about $88-billion, as proof panic-selling looms.
But consider the traditional haven alternatives, like bonds. Their 2022 outflows dwarf that of stocks. Little wonder, when the Bloomberg Global Aggregate Bond Index, measuring corporate and government debt, is down 20 per cent from its highs in March, 2020, in Canadian dollars, worse than world stocks’ decline of 18.5 per cent from their highs in December, 2021.
Long-term bonds aren’t much better, with 10-year Canadian bonds down 13 per cent and U.S. Treasuries down 17 per cent this year. Most observers predict interest rates must rise more – hence, bond prices would fall further. Why, then, swap stocks for bonds now? Of course, the wicked witch of inflation fear flies everywhere, which would vanquish bond interest payments’ value.
That applies to cash also. Why pile into cash when it will be worth 7 per cent less next year at Canada’s current inflation rates? And the interest rate on cash? Is it worth the inflation risk? Hardly! It’s tiny, as you know.
Why? Banks, overly flush with deposits, don’t need to lure even more with higher rates. Even Canada’s best high-interest savings accounts yield just 4 per cent – while U.S. “high-yield” accounts hover around 3 per cent or less. Stocks may fall. Or they may rise. But cash will be worth markedly less. Exiting stocks for cash locks in a real loss.
Gold, that supposed master inflation hedge, shined brightly in February and early March. Since then it tarnished, down 13.3 per cent, more than global stocks’ decline of 6.2 per cent over the same span.
Do you think crypto is the new gold, as many argued before 2022? Bitcoin’s drop of 73.6 per cent in U.S. dollars from the November, 2021, high through the low of September, 2022, killed hope of digital havens. Nothing is basically wrong with crypto. But it’s volatile, kind of like pork bellies on steroids: speculative, and surely no haven.
Real estate goblinizes people now, with prices elevated from Saskatoon to Santa Fe and mortgage rates at nosebleed levels and rising. The Canadian Real Estate Association reporting shows slowing, but still-positive, year-over-year prices. Yet, cracks are appearing through increased numbers of listed price drops among unsold listed homes and lots. Plus, real estate lacks liquidity, adding risk. You can get in but it’s not easy getting out now.
Hence, classic capitulation likely won’t come. 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 and tremble at dollar terror, would fit that perfectly. No one can ever be sure. But when most feel terror, it’s time to feel terrific toward risk assets such as stocks. Like now. Happy Halloween.
Ken Fisher is founder, executive chairman and co-chief investment officer of Fisher Investments.