US stocks have approached a bear market. Here’s what it means Business

Rising interest rates high inflation, war in Ukraine and China’s economic slowdown have forced investors to reconsider the prices they are willing to pay for a wide range of stocks, from high-tech companies to traditional automakers. Big swings, such as on Friday, were commonplace.

The last bear market took place just two years ago, but it will still be the first for those investors who started trading from their phones during the pandemic. For years, thanks in large part to the extraordinary actions of the Federal Reserve, stocks often seemed to go in only one direction: up. Now the familiar call to “buy the fall” after each market fluctuation gives way to the fear that the fall will turn into a crater.

Here are some common questions about bear markets:

WHY IS IT CALLED BEARS MARKET?

The bear market is a term used by Wall Street when an index such as the S&P 500, Dow Jones Industrial Average or even individual stocks has fallen 20% or more from a recent high over a long period of time.

Why use a bear to reflect a market downturn? The bears are falling asleep, so the bears represent a retreating market, said Sam Stoval, CFRA’s chief investment strategist. In contrast, the nickname Wall Street for a booming stock market is a bull market because bulls charge, Stoval said.

The S&P 500, Wall Street’s top health barometer, rose less than 1 point on Friday, leaving it 18.7% below the January 3 high. The Nasdaq is already in the bear market, down 29.3% from its peak at 16,057.44 on 19 November. The Dow Jones industrial index is about 15% below its last peak.

The last bear market for the S&P 500 operated from 19 February 2020 to 23 March 2020. During this month, the index fell by 34%. This is the shortest bear market.

WHAT worries investors?

The enemy of the №1 market is interest rates, which are rising rapidly as a result of high inflation, which is hitting the economy. Low rates act as steroids for stocks and other investments, and Wall Street is now experiencing a withdrawal.

The Federal Reserve has made an aggressive turn from supporting financial markets and the economy at record low rates and focused on fighting inflation. The central bank has already raised its key short-term interest rate from a record low to near zero, prompting investors to move their money to riskier assets such as stocks or cryptocurrencies to get better returns.

The planned steps will slow down the economy, making loans more expensive. The risk is that the Fed could cause a recession if it raises rates too high or too fast.

The Russian war in Ukraine has also put increasing pressure on inflation, pushing up commodity prices. And worries about China’s economy, the world’s second-largest, have added to the gloom.

SO, WE JUST NEED TO GET RID OF THE REBELLION?

Even if the Fed can accomplish the delicate task of reducing inflation without causing a downturn, higher interest rates continue to put downward pressure on stocks.

When customers pay more to borrow money, they can’t buy as many things, so less revenue goes to the company’s profits. Stocks tend to track earnings over time. Higher rates also make investors less willing to pay higher prices for stocks that are riskier than bonds when bonds suddenly pay more interest thanks to the Fed.

Critics said the overall stock market this year looked more expensive than history. Major technology stocks and other pandemic winners were considered the most expensive, and those stocks were the most punished because of rising rates. But the pain is widespread, with Target shares and other retailers are falling sharply this week after reporting lower-than-expected earnings.

According to Ryan Detrick, chief market strategist at LPL Financial, stocks have fallen by an average of nearly 35% when the bear market coincides with a recession, compared to a fall of nearly 24% when the economy avoids a recession.

YES I HAVE TO SELL EVERYTHING NOW, right?

If you need money now or want to record losses, yes. Otherwise, many advisors suggest surviving the ups and downs, remembering that fluctuations are the price of admission for the higher returns that stocks provide in the long run.

While dumping stocks will stop bleeding, it will also prevent any potential benefits. Many of the best days for Wall Street took place either during the bear market or right after it ended. This includes two separate days in the middle of the 2007-2009 bear market, where the S&P 500 grew by about 11%, as well as jumps of more than 9% during and shortly after the 2020 monthly bear market.

Advisors offer to invest in stocks only if they do not take several years. The S&P 500 returned from each of the previous bear markets to eventually rise to another all-time high.

The decade of decline for the stock market after bursting the dotcom bubble in 2000 was knowingly tough, but stocks were often given the opportunity to recover their highs for several years.

HOW MUCH DO BEAR MARKETS LIVE AND TO WHAT DEPTH DO THEY GO?

On average, after World War II, the bear market took 13 months to move from a peak to a minimum, and 27 months to return to break-even. During this time, the S&P 500 fell by an average of 33% during bear markets. The biggest decline since 1945 was in the bear market of 2007-2009, when the S&P 500 fell 57%.

History shows that the faster the index enters the bear market, the smaller they tend to become. Historically, the stock took 251 days (8.3 months) to fall into a bear market. If the S&P 500 fell 20% on a faster clip, the index lost an average of 28%.

The longest bear market lasted 61 months and ended in March 1942 and reduced the index by 60%.

HOW DO WE KNOW WHEN THE BEARS MARKET ENDS?

Typically, investors are looking for 20% return from a low point as well as a steady return for at least a six-month period. It took less than three weeks for stocks to rise 20% from their March 2020 low.