Stocks just entered a bear market — here’s what that means for your money
The stock market’s tumble this year has put the S&P 500 into a bear market — the term for when stocks decline at least 20% from their most recent high.
The index lost 4% on Monday to close at 3,750, putting it 21% below its peak in January.
Wall Street is grappling with the impact of rising interest rates, high inflation and energy costs, the war in Ukraine and a slowdown in China’s economy, prompting investors to reconsider the prices they’re willing to pay for stocks.
Bear market are quite common. The last one occurred two years ago when the U.S. economy was hit by the pandemic. But this slump could mark the first downturn for younger investors who started trading on their phones during the pandemic, when stocks surged as the economy recovered its footing from the initial COVID-19 shutdown in 2020.
“The financial markets have struggled in their worst start to a year in decades,” John Lynch, chief investment officer for Comerica Wealth Management, said in a June 13 research note.
“Surging inflation, the pivot in Fed policy, and historically pricey equity valuations were on the minds of investors as the year began, but the combination of COVID-19 lockdowns in China and Russia’s invasion of Ukraine has escalated volatility further with investors becoming increasingly concerned about the possibility of global recession sometime within the next year,” he said. Stocks have tended to move in one direction over the past two years: up. The familiar rally cry to “buy it the dip” after market wobbles is giving way to fears that the dip could become a crater.
A fall can be nerve-wracking, but ultimately this is part the price we pay to earn strong returns over time,” Brad McMillan (chief investment officer at Commonwealth Financial Network), said in a research note last week.
Here are the facts about a bear-market.
Why does it get called a bear-market?
A bear market is a term used by Wall Street when an index like the S&P 500, the Dow Jones Industrial Average, or even an individual stock, has fallen 20% or more from a recent high for a sustained period of time. Why use a bear as a symbol of a market slump? Bears hibernate so bears signify a market that’s retreating. Sam Stovall is chief investment strategist at CFRA. Stovall stated that Wall Street’s nickname for a rising stock market is a bullmarket, as bulls charge.
The S&P 500 index was down 1.9% in Friday afternoon trading, putting it 20.3% below its high set on January 3. But stocks recovered by the end of trading at 4 p.m., with the S&P 500 closing up 1 point for the day. Overall, the index is down about 19% from its most recent high in January.
For many investors, the bear market will become official if the S&P 500, Wall Street’s main barometer of health, finishes the day at least 20% down from its peak.
The Nasdaq is already in a bear market, down 31% from its peak of 16,057. 44 on November 19. The Dow Jones Industrial Average is more than 16% 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% in that one-month period, as investors reacted to lockdown orders that closed businesses and kept consumers at home. It’s the shortest ever bear market.
What should investors be concerned about?
Market enemy No.
The market enemy number one is the interest rates. They are rapidly rising due to the high inflation that has decimated the economy. Low rates are like steroids for stocks, other investments, and Wall Street is currently going through withdrawal.
The Federal Reserve has made an aggressive pivot away from propping up financial markets and the economy with record-low rates and is focused on fighting inflation, which hit a new 40-year record in May.
Last month, the Fed signaled additional rate increases of double the usual amount are likely in upcoming months, part of its plan to make borrowing more expensive and put the brakes on spending by consumers and businesses. But the Fed’s rate increases could lead to a recession if they are too fast or too high. The war in Ukraine has also pushed up commodity prices, which has put upward pressure on inflation. The gloomy outlook has been exacerbated by concerns about China’s economy.
We just need to avoid a depression.
Economists say the odds of a recession are increasing due to high inflation, which could crimp consumer spending, and the Fed’s rate hikes. Currently, the chances of a recession are about 30%, according to research from Moody’s Analytics and a Wall Street Journal survey of economists. But even if a recession is avoided the Fed’s interest rates hikes will still exert downward pressure on stocks.
If customers pay more to borrow money, they are unable to buy as much stuff. This means less revenue for a company. Stocks tend to track profits over the long-term. Investors are less likely to pay higher prices for stocks than they are for bonds. Stocks are more risky than bonds and are therefore less attractive to investors.
Critics stated that the stock market overall came into the year looking expensive based on historical data. The most expensive stocks were those that were deemed to be big technology stocks or other pandemic winners. Inflation rates have also made these stocks the most punishable. Target and other retailers are experiencing severe pain, with shares plummeting this week due to lower-than-expected profits.
Stocks have historically declined almost 35% on average when a bear market coincides with a recession, compared with a nearly 24% average drop when the economy avoids a recession, according to Ryan Detrick, chief market strategist at LPL Financial.
“Going back more than 50 years shows that only once was there a bear market without a recession that lost more than 20% and that was during the Crash of 1987,” Detrick said in a research note.
During other near-bear markets that occurred without a recession, stocks bottomed out at a roughly 19% decline, he added.
Should I sell everything to avoid more losses?
Only if the money is urgently needed or you want to avoid losing your investment, experts say. Many advisers recommend that you ride out the ups and falls, but remember that the higher returns stocks provide over the long-term are worth the price of admission.
While dumping stocks would stop the bleeding it would also prevent any potential gains. Many of Wall Street’s best days have been during a bear market, or shortly after it ended.
“Declines create the conditions for future growth, which often happens quicker than anyone anticipates,” McMillan stated.
For instance, in the middle of the 2007-2009 bear market, there were two separate days where the S&P 500 surged roughly 11%, as well as leaps of better than 9% during and shortly after the roughly monthlong 2020 bear market.
Advisers recommend that you only invest money in stocks if you don’t need it for many years. The S&P 500 has come back from every one of its prior bear markets to eventually rise to another all-time high.
The down decade for the stock market following the 2000 bursting of the dot-com bubble was a notoriously brutal stretch, but stocks have often been able to regain their highs within a few years. How long do bear markets last.
On average, bear markets have taken 13 months to go from peak to trough and 27 months to get back to breakeven since World War II. The S&P 500 index has fallen an average of 33% during bear markets in that time. The biggest decline since 1945 occurred in the 2007-2009 bear market when the S&P 500 fell 57%.
History reveals that the more quickly an index enters a bear market, they tend to be shallower. Historically, stocks have taken 251 days (8.3 months) to fall into a bear market. When the S&P 500 has fallen 20% at a faster clip, the index has averaged a loss of 28%.
The longest bear market lasted 61 months and ended in March 1942 and cut the index by 60%. How do we know when a bear market has ended?
Generally, investors look for a 20% gain from a low point as well as sustained gains over at least a six-month period. It took less than three weeks for stocks to rise 20% from their low in March 2020.
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