What is Capitulation?

What is Capitulation?

June 15, 2022

In the investment world, capitulation is defined as a certain set of conditions that produce an outcome. In our case, it is economic conditions that allow the market to find a bottom. As you are aware, the market has had a rough first half of 2022. It is very common to have two or three pullbacks each year (0-10% down), one to two corrections (10-20% down) and occasionally a recession which is defined as a drop of 20% or more. It usually takes a perfect storm of events to create a recession. The reasons for the recent market sell-off has been a perfect storm of events such as supply chain issues, energy policy (or lack thereof), federal monetary policy, the Ukraine-Russian war, labor shortages, inflation, and last but certainly not least, a slow response to economic conditions by the Federal Reserve. The perfect storm for why this country is where it is today. Have we reached the bottom or capitulation? There are some that say we have and others saying we have another 5-10% to the downside before we get there. 


Here is the report card for the year so far. On average, the S&P, DOW, Russell, and NASDAQ as of yesterday show the market down 22.95% year to date. The accounts I manage at Global View Capital are down on average from 7-11% based upon risk tolerance. No one likes to be down at any time but that is the nature of the market. It takes down markets to reprice stocks so there is good money to be earned in up markets. This chart from Legg Mason shows that since 1937 the market is up 76% of the time. The average return in the up years is 19.4%.  Times like these are not fun to experience but they are part of the ride. Very few investments have outperformed the stock market going back to 1937. 


Those of you who are investing monthly need to realize that when the market is down like we see now, everything is on sale. You are purchasing equites that are greatly reduced in price which means you are purchasing more shares for your money. When the market turns around, and history shows that it always has, owning more shares is going to benefit you in the long run. Don’t become alarmed. This is all part of being an investor. After all, if the market was always up, there would be many that could not participate in the ownership of companies. In my opinion, the market is oversold and ready to reprice soon, which would indicate recapitulation. From this point forward there is usually good money to be earned until the cycle repeats itself and another repricing is necessary. 


In nearly all cases our accounts are down only half that of the market average in general. This is what you pay us to do. I have a tremendous amount of confidence in the way we read and handle cycles in the market regardless of whether the market is up or down. We are watching your accounts daily and doing all we can to manage your portfolio to your risk tolerance.