The stock market has seen some wild swings in the bear market of 2022. The S&P 500 had its worst start to the year since 1970, dropping 21% the first six months. Since entering a bear market in early June, investors have been waiting for a sign the downturn is over.

That sign is capitulation, which literally means to surrender. So what does it mean in the finance world?

Definition

Capitulation is the moment a significant number of investors throw in the towel and sell stock at a loss.

It’s a panic sell, and it comes when investors fear a stock or entire market will plunge even deeper. Capitulation, then, becomes sort of a self-fulfilling prophecy brought on by a high amount of trading volume that tanks a stock or market.

How to identify capitulation

It’s hard to know for certain while capitulation is happening as bear markets come with many dramatic swings. A definitive capitulation moment is better identified in hindsight, after the price hits bottom for good and rebounds.

That’s the point where the price plunge is so deep, it shakes out all of the investors who are likely to cut and run. That just leaves buyers in the space who then drive up the price.

The waiting game

Caused by the onset of the pandemic, the last bear market in March 2020 lasted only one month, though losses were steep. Before that, the stock market had experienced an unprecedented period of growth following the Great Recession, which means investors have experienced very little downturn since 2009.

In 2022, investors and analysts are eager to identify that moment of capitulation which often signifies the end of the bear market.

What financial term do you want explained in our next Word On The Street? Comment with your suggestion.