NEW YORK — The bears are rumbling towards Wall Street.
This year’s stock market slip has pulled the S&P 500 close to what is known as a bear market.
Rising interest rates, high inflation, the war in Ukraine, and a slowdown in China’s economy have caused investors to reconsider the prices they’re willing to pay for a wide range of stocks, from high-flying tech companies to traditional automakers.
The last bear market happened just two years ago, but it would still be a first for those investors who started trading on their phones during the pandemic.
For years, thanks in large part to extraordinary actions by the Federal Reserve, stocks often seemed to move in only one direction: up. The well-known rallying cry to “buy the dip” after every market wobble gives way to the fear of the dip turning into a crater.
WHY IS IT CALLED A BEAR MARKET? A bear market is a term used by Wall Street when an index such as the S&P 500, the Dow Jones Industrial Average, or even an individual stock has fallen 20% or more from a recent high over a sustained period. Here are some frequently asked questions about bear markets:
Why use a bear to represent a market slump? Bears hibernate, so bears represent a retreating market, said Sam Stovall, chief investment strategist at CFRA. In contrast, Wall Street’s nickname for a rising stock market is a bull market because bulls charge, Stovall said.
The S&P 500 index fell 165.17 points to 3,923.68 on Wednesday. It is now down 18.2% from its high of 4,796.56 on January 3. The Nasdaq is already in a bear market, down 29% from its high of 16,057.44 on November 19. The Dow Jones Industrial Average is 14.4% below its most recent peak.
The most recent bear market for the S&P 500 ran from February 19, 2020, through March 23, 2020. The index fell 34% over that one month. It is the shortest bear market ever.
WHAT HELPS INVESTORS? Market enemy No. 1 is interest rates, rising rapidly due to the high inflation plaguing the economy. Low rates act like steroids for stocks and other investments, and Wall Street is now in a pullback.
The Federal Reserve has made an aggressive linchpin to support the financial markets and the economy with record-low interest rates and is focused on fighting inflation. The central bank has already raised its key short-term interest rate from its record low of near zero, encouraging investors to move their money into riskier assets like stocks or cryptocurrencies to get better returns.
Last week, the Fed signaled that further rate hikes of twice the usual amount are likely to occur in the coming months. Consumer prices are at their highest level in four decades, rising 8.3% in April from a year ago.
The design moves will slow the economy, making it more expensive to borrow. The Fed could trigger a recession if interest rates are raised too high or too quickly.
Russia’s war in Ukraine has also put upward pressure on inflation by pushing commodity prices. And worries about the Chinese economy, the world’s second-largest, have added to the gloom.
SO WE AVOID A RECESSION? Even if the Fed can curb inflation without triggering a downturn, higher interest rates still put downward pressure on equities.
If customers pay more to borrow money, they can’t buy as much stuff, meaning less revenue flows into the bottom line. Stocks tend to track earnings over time. Higher interest rates also make investors less willing to pay higher prices for stocks, riskier than bonds, when bonds suddenly pay more interest thanks to the Fed.
Critics said the overall stock market in the year looked pricey compared to history. Major technology stocks and other winners of the pandemic have been considered the most expensive, and those stocks have been punished the most as interest rates have risen.
According to Ryan Detrick, chief market strategist at LPL Financial, stocks are down nearly 35% on average when a bear market coincides with a recession, compared to a drop of almost 24% when the economy avoids a recession.
DO I HAVE TO SELL EVERYTHING NOW, RIGHT? If you need the money now or want to record the losses, yes. Otherwise, many advisors suggest riding through the ups and downs, remembering that the swings are the entry point to the stronger returns that stocks have delivered over the long term.
While dumping stocks would stop the bleeding, it would also prevent potential profits. Many of the best days for Wall Street have taken place during a bear market or just after the end of a market. That includes two separate days in the middle of the 2007-2009 bear market, where the S&P 500 was up about 11%, as well as jumps of better than 9% during and shortly after the roughly one-month bear market of 2020.
Advisers suggest investing money in stocks only if it is no longer necessary for many years. The S&P 500 has bounced back from all of its previous bear markets to rise to a new all-time high. The stock market’s downward decade after the 2000 dot-com bubble burst was notoriously brutal, but stocks have often been able to bounce back to their peaks within a few years.
HOW LONG DO BEAR MARKETS LAST, AND HOW DEEP DO THEY GO? On average, bear markets have taken 13 months from peak to trough and 27 months to return to breakeven since World War II. The S&P 500 index has fallen an average of 33% during bear markets. The biggest drop since 1945 occurred in the bear market of 2007-2009 when the S&P 500 fell 57%.
History shows that the faster an index enters a bear market, the more superficial they tend to be. Historically, stocks have taken 251 days (8.3 months) to join a bear market. When the S&P 500 is down 20% at a faster clip, the average index is down 28%.
The longest bear market lasted 61 months and ended in March 1942, dropping the index by 60%.
HOW DO WE KNOW WHEN A BEAR MARKET HAS ENDED? Investors generally aim for a 20% gain from a low and sustained improvement over at least six months. It took less than three weeks for stocks to gain 20% from their March 2020 low.
