The S&P 500 is in a bear market; this is what that means

By STAN CHOE and ALEX VEIGA

NEW YORK (AP) – Wall Street is back in the clutches of a bear market as inflation concerns and higher interest rates overwhelm investors.

The Federal Reserve has said it will aggressively raise interest rates to contain inflation, the highest in decades. Add to that the war in Ukraine and a slowdown in China’s economy, and investors have been forced to reconsider what they’re willing to pay for a wide range of stocks, from high-flying tech companies to traditional automakers. Big swings have become commonplace and Monday was no exception.

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. Thanks in large part to extraordinary actions by the Federal Reserve, stocks appeared to be moving in one direction for many years: up. The rallying cry of “buy the dip” after each market decline has weakened following stabbing losses and severe declines in risky assets such as cryptocurrencies. Bitcoin fell below $23,000 on Monday. The price for Bitcoin approached $68,000 late last year.

Here are some frequently asked questions about bear markets:

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 of time.

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, Wall Street’s leading health barometer, fell 3.9%. It is 21.8% lower than the record set at the beginning of this year and now in a bear market.

The Dow index fell 2.8% and the tech-heavy Nasdaq composite, already in a bear market, fell 4.7%.

The most recent bear market for the S&P 500 ran from February 19, 2020 through March 23, 2020. The index fell 34% during that one-month period, the shortest bear market on record.

WHAT HELPS INVESTORS?

Market enemy No. 1 is interest rates, which are 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, which had encouraged investors to move their money into riskier assets like stocks or cryptocurrencies to get better returns.

Last month, 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 8.6% in May from a year ago.

The design moves will slow the economy by making it more expensive to borrow. The risk is that 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 up commodity prices. And worries about the Chinese economy, the world’s second largest, have added to the gloom.

SO WE JUST AVOID A RECESSION?

Even if the Fed can do the delicate job of curbing inflation without triggering a downturn, higher interest rates are still putting downward pressure on equities.

If customers pay more to borrow money, they can’t buy as much stuff, meaning less revenue flows into bottom line. Stocks tend to track earnings over time. Higher interest rates also make investors less willing to pay higher prices for stocks, which are riskier than bonds, when bonds suddenly pay more interest thanks to the Fed.

Critics said the overall stock market went into the year looking pricey compared to history. Major technology stocks and other winners of the pandemic have been seen as the most expensive, and those stocks have been punished the most as interest rates have risen. But the pain is spreading wide, with retailers signaling a shift in consumer behavior.

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 nearly 24% when the economy avoids a recession.

SO 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 a market closes. 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 will no longer be necessary in a number of years. The S&P 500 has bounced back from all of its previous bear markets to eventually rise to a new all-time high.

The stock market’s downward decade after the 2000 dot-com bubble burst was a notoriously brutal one, 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 to go 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 during that time. The biggest decline 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 enter a bear market. When the S&P 500 is down 20% on a faster clip, the index is down 28% on average.

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

HOW DO WE KNOW WHEN A BEAR MARKET HAS ENDED?

In general, investors aim for a 20% gain from a low and sustained gains over a period of at least six months. It took less than three weeks for stocks to gain 20% from their March 2020 low.

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