BUSINESS

A bear market is hitting Wall Street. Here’s what that means

May 20, 2022, 5:00 PM
bear market explained...
Pedestrians walk by the New York Stock Exchange, Wednesday, May 18, 2022 in New York. (AP Photo/Peter Morgan)
(AP Photo/Peter Morgan)

NEW YORK (AP) — Investors on Wall Street need a place to hide.

The stock market’s skid this year has pulled the S&P 500 within the grasp of what’s 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 this would still be a first for those investors that got their start trading on their phones during the pandemic. For years, thanks in large part to extraordinary actions by the Federal Reserve, stocks often seemed to go in only one direction: up. Now, the familiar rallying cry to “buy the dip” after every market wobble is giving way

to fear that the dip is turning into a crater.

Here are some common questions asked 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 an individual stock, has fallen 20% or more from a recent high for a sustained period of time.

Why use a bear to represent a market slump? Bears hibernate, so bears represent a market that’s retreating, said Sam Stovall, chief investment strategist at CFRA. In contrast, Wall Street’s nickname for a surging stock market is a bull market, because bulls charge, Stovall said.

The S&P 500 index was down 1.9% in Friday afternoon trading, putting it 20.3% below its high set on Jan. 3. For many investors, the bear market would 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 Nov. 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. It’s the shortest bear market ever.
___
WHAT’S BOTHERING INVESTORS?

Market enemy No. 1 is interest rates, which are rising quickly as a result of the high inflation battering the economy. Low rates act like steroids for stocks and other investments, and Wall Street is now 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. The central bank has already raised its key short-term interest rate from its record low near zero, which had encouraged investors to move their money into riskier assets like stocks or cryptocurrencies to get better returns.

Earlier this month, the Fed signaled additional rate increases of double the usual amount are likely in upcoming months. Consumer prices are at the highest level in four decades, and rose 8.3% in April compared with a year ago.

The moves by design will slow the economy by making it more expensive to borrow. The risk is the Fed could cause a recession if it raises rates too high or too quickly.

Russia’s war in Ukraine has also put upward pressure on inflation by pushing up commodities prices. And worries about China’s economy, the world’s second largest, have added to the gloom.
___

SO, WE JUST NEED TO AVOID A RECESSION?

Even if the Fed can pull off the delicate task of tamping down inflation without triggering a downturn, higher interest rates still put downward pressure on stocks.

If customers are paying more to borrow money, they can’t buy as much stuff, so less revenue flows to a company’s bottom line. Stocks tend to track profits over time. Higher rates also make investors less willing to pay elevated prices for stocks, which are riskier than bonds, when bonds are suddenly paying more in interest thanks to the Fed.

Critics said the overall stock market came into the year looking pricey versus history. Big technology stocks and other winners of the pandemic were seen as the most expensive, and those stocks have been the most punished as rates have risen. But the pain is spreading widely, with shares of Target and other retailers slumping hard this week after reporting weaker-than-expected profits.

Stocks have declined almost 35% on average when a bear market coincides with a recession, compared with a nearly 24% drop when the economy avoids a recession, according to Ryan Detrick, chief market strategist at LPL Financial.
___

SO I SHOULD SELL EVERYTHING NOW, RIGHT?

If you need the money now or want to lock in the losses, yes. Otherwise, many advisers suggest riding through the ups and downs while remembering the swings are the price of admission for the stronger returns that stocks have provided over the long term.

While dumping stocks would stop the bleeding, it would also prevent any potential gains. Many of the best days for Wall Street have occurred either during a bear market or just after the end of one. That includes two separate days in the middle of the 2007-2009 bear market 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 suggest putting money into stocks only if it won’t be needed for several 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 AND HOW DEEP DO THEY GO?

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 shows that the faster an index enters into a bear market, the shallower they tend to be. 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.
___
Veiga reported from Los Angeles. __ Follow more of AP’s business coverage at https://apnews.com/hub/business.

Today’s Top Stories

Business

In this undated photo released by Toyota Motor Corp., its bZ4X vehicle is shown during an online pr...
YURI KAGEYAMA AP Business Writer

Toyota recalls electric car for faulty wheel that may detach

The "bz" in the recalled model's name, as well as others in the works, stands for a "beyond zero" series, including sport-utility vehicles of all sizes, pickup trucks and sportscars, according to Toyota.
4 days ago
A model wears a creation as part of the Giorgio Armani men's Spring Summer 2023 collection presente...
COLLEEN BARRY

Gucci unveils ‘HaHaHa’ collaboration with Harry Styles

Gucci has teamed up with Harry Styles for a between-season collection that infuses tailoring with adolescent joy. The collection is titled “HaHaHa.”
8 days ago
A now hiring sign in an Arby's window.; the Utah employment summary for May showed a slight slowing...
Amie Schaeffer

May’s Utah employment report showing signs of inflation impact

The employment rate in Utah remains steady but may be showing signs of inflation's impact, according to the state's May employment summary.
11 days ago
Attic fire in Cowabunga Bay building....
Mark Jones

Cowabunga Bay Water Park set to reopen Thursday after fire last weekend

Following a building fire last weekend, Draper's Cowabunga Bay Water Park is scheduled to reopen to the public on Thursday.
13 days ago
Utah airbnb rentals rising interest rates affecting millennial home buyers...
Dan Bammes

One realtor sees “signs of hope” in Utah housing market

With home listings up and home sales down, one Utah realtor is encouraged about the future of the Utah housing market, leading to what she calls "signs of hope."
14 days ago
Some executives are keeping their employees home in a way to save money and possibly help lower the...
Heather Kelly

Working from home could help bring down gas prices

Some businesses are having employees return to working remotely as a way to have money on gas, and possibly help lower gas prices.
18 days ago

Sponsored Articles

Tax Harassment...
Jordan Wilcox

The best strategies for dealing with IRS tax harassment | You have options!

Learn how to deal with IRS tax harassment. This guide will teach you how to stop IRS phone calls and letters, and how to handle an IRS audit.
spend a day at Bear Lake...
Bear Lake Convention and Visitors Bureau

You’ll love spending the day at Bear Lake | How to spend a day at Bear Lake

Bear Lake is a place that needs to be experienced. Spend a day at Bear Lake.
Curb Appeal...
Price's Guaranteed Doors

How to have the best of both worlds for your house | Home security and curb appeal

Protect your home and improve its curb appeal with the latest security solutions like beautiful garage doors and increased security systems.
Prescription opioids can be disposed of during National Prescription Take Back Day...
Know Your Script

Prescription opioid misuse | How to protect your family from the opioid epidemic

Studies have shown that prescription opioid misuse has increased since COVID-19. So what do you need to know about these opioids?
Follow @ikeyospe...

Tax Tuesday: The Most Common Mistakes People Make When Filing Their Taxes

Fortunately, for most average earners, they will not end up owing overpayments received for the Child Tax Credit in 2021.
Follow @ikeyospe...

Tax Tuesday: How will last year’s child tax credits affect you?

Fortunately, for most average earners, they will not end up owing overpayments received for the Child Tax Credit in 2021.
A bear market is hitting Wall Street. Here’s what that means