by Stan Cho and Alex Vega
NEW YORK (AP) – Wall Street is back in the throes of a bear market as worries about inflation and high interest rates overwhelm investors.
The Federal Reserve has indicated it will aggressively raise interest rates to try to control inflation, which is at its highest in decades. The war in Ukraine and a slowdown in China’s economy have forced investors to reconsider what they were willing to pay for a wide range of stocks, from high-profile tech companies to traditional automakers. Hm. Big swings have become common and Monday was no exception.
The last bear market was just two years ago, but it will still be a first for investors who started trading on their phones during the pandemic. Thanks in large part to extraordinary action by the Federal Reserve, the stock has largely gone in only one direction over the years: up. The “dip dip” rally cry has been toned down after each market dip following massive losses and heavy losses in risky assets like cryptocurrencies. Bitcoin fell below $23,000 on Monday. At the end of last year, the price of bitcoin reached almost $68,000.
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 like the S&P 500, the Dow Jones Industrial Average, or even a single stock loses 20% from a recent high for an extended period of time. or more has fallen.
Why Use Bears to Represent Bear Markets? Bears hibernate, so bears represent a market that is retreating, said Sam Stovall, chief investment strategist at CFRA. In contrast, Wall Street’s nickname for a rising stock market is a bull market because the bulls charge, Stovall said.
The S&P 500, the main barometer of Wall Street’s health, fell 3.9% on Monday. The index fell another 0.5% on Tuesday afternoon, down 22.2% from its record set earlier in the year and is now in a bear market.
The Dow Industrials fell 2.8% on Monday and the tech-heavy Nasdaq Composite, already in a bear market, fell 4.7%.
The most recent bear market for the S&P 500 lasted from February 19, 2020 to March 23, 2020. The index fell 34% in that one-month period, the smallest bear market on record.
What bothers investors?
The market’s #1 enemy is interest rates, which are rising rapidly due to high inflation plaguing the economy. Low interest rates are acting like steroids for stocks and other investments, and Wall Street is currently in a period of pullback.
The Federal Reserve has aggressively shifted course, driving financial markets and the economy to record low interest rates and focusing on fighting inflation. The central bank has already raised its short-term interest rate from its near-zero record low, encouraging investors to switch their money to riskier assets like stocks or cryptocurrencies for better returns.
Last month, the Fed indicated that more rate hikes of double the normal amount are likely in the coming months. Consumer prices are at their highest level in four decades, up 8.6% year-on-year in May.
The proposed move would slow the economy by making borrowing more expensive. The risk is that the Fed could trigger a recession if it hikes rates too much or too quickly.
Russia’s war in Ukraine has also put pressure on inflation through rising commodity prices. And concerns about the economy of China, the world’s second largest, have added to the gloom.
So we just have to survive a recession?
Even if the Fed can handle the tricky task of bringing down inflation without triggering a recession, higher interest rates continue to put downward pressure on equities.
If customers pay more to borrow money, they can’t buy as much, so less revenue goes to the bottom of the business. Stocks track gains over time. Higher interest rates also make investors less willing to pay higher prices for stocks, which are riskier than bonds, when bonds are suddenly paying more interest to the Fed.
Critics said the stock market as a whole looked more expensive than ever. Big tech stocks and other winners from the pandemic have been seen as the most expensive, and these stocks have been penalized the most as interest rates have risen. But the pain is spreading, and retailers are pointing to a shift in consumer behavior.
The bond market is also declining. Overnight, the 2-year Treasury yield briefly rose above the 10-year Treasury yield. This reversal of short- and long-term yields has been a reliable indicator of a recession for years, although a recession can strike anywhere from a few weeks to a year or two later.
According to Ryan Detrick, chief markets strategist at LPL Financial, stocks that have coincided with the recession have fallen about 35% on average, compared to a nearly 24% drop when the economy emerges from a recession.
So now I have to sell everything, right?
If you need money now or want to close at a loss, then yes. Otherwise, many advisors suggest that riding through the ups and downs while missing the swings is the entry price for stocks that have strong returns over the long run.
While stock dumping stops the bleeding, it also stops any potential gains. Many of Wall Street’s best days have come either during a bear market or after it has ended. That includes two separate days in the middle of the 2007-2009 bear market, when the S&P 500 gained about 11%, as well as a jump of more than 9% during and immediately after the 2020 bear market.
Advisors suggest investing money in stocks only if it will not be needed for many years. The S&P 500 has recovered from all of its previous bear markets and has finally hit another all-time high.
The decade that followed was a notoriously brutal stretch for the stock market after the dot-com bubble burst in 2000, but stocks can often revisit their highs within a few years.
How long do bear markets last and how deep do they go?
Since World War II, it has taken bear markets an average of 13 months to go from high to low and 27 months to break even again. The S&P 500 index has fallen an average of 33% during this period during bear markets. The biggest drop since 1945 occurred in the 2007-09 bear market, when the S&P 500 fell 57%.
History shows that the faster an index enters a bear market, the flatter it becomes. Historically, it has taken 251 days (8.3 months) for stocks to fall into a bear market. When the S&P 500 has fallen sharply by 20%, the index has lost an average of 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 is over?
Typically, investors are looking for a 20% gain from the bottom, as well as sustained gains for at least a six-month period. It took less than three weeks for shares to surge 20% from their March 2020 lows.
Vega reported from Los Angeles.
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