NEW YORK (AP) – Wall Street investors need a place to hide.
The stock market slide this year has dragged the S&P 500 index close to what is known as a bear market. Rising interest rates, high inflation, the war in Ukraine and China’s economic slowdown have investors rethinking how much they’re willing to pay for a wide range of stocks, from high-tech companies to large corporations. traditional car manufacturers.
The last bear market happened just two years ago, but it will still be a first for investors who are starting to trade on their phones during the pandemic. For years, thanks in large part to the unusual actions of the Federal Reserve, stocks seemed to only go in one direction: up. Now, the familiar rallying call to “buy the bears” after each market wobble is giving way to fear that the drop is turning into a crater.
Here are some frequently asked questions about bear markets:
WHY IS IT CALLED A BEAR Town?
A bear market is a term used by Wall Street when an index like the S&P 500, Dow Jones Industrial Average, or even an individual stock, has fallen 20% or more from recent highs over a period of time. maintenance time.
Why use a bear to represent a market drop? Sam Stovall, chief investment strategist at CFRA, said bears hibernate, so bears represent a retreating market. By contrast, Wall Street’s moniker for the bull market is a bull market, because bulls charge, Stovall said.
The S&P 500 index fell 22.89 points on Thursday to 3,900.79. It is now down 18.7% from a high of 4,796.56 on January 3. The Nasdaq has been in a bear market, down 29.1% from a peak of 16,057.44 on Nov. 19. The Dow Jones Industrial Average is 15% below its recent peak high.
The most recent bear market for the S&P 500 ran from February 19, 2020 to March 23, 2020. The index fell 34% in that one-month period. It was the shortest bear market ever.
WHAT ARE ALL INVESTORS?
The market’s number 1 enemy is interest rates, which are increasing rapidly due to high inflation adversely affecting the economy. Low rates act like steroids for stocks and other investments, and Wall Street is pulling out now.
The Federal Reserve has taken a positive turn from supporting financial markets and the economy with record low rates and focusing on fighting inflation. The central bank has raised key short-term interest rates from record lows near zero, which has encouraged investors to move their money into riskier assets like stocks or cryptocurrencies to gain better profits.
Last week, the Fed signaled that an additional rate hike to double its usual level could happen in the coming months. Consumer prices are at a four-decade high and rose 8.3% in April from a year ago.
Moves by design slow the economy by making borrowing more expensive. The risk is that the Fed could trigger a recession if it raises rates too high or too quickly.
Russia’s war in Ukraine has also put pressure on inflation by pushing up commodity prices. And worries about China’s economy, the world’s second-largest, have grown even more somber.
SO, WE ONLY NEED TO AVOID A KNOWLEDGE?
Even if the Fed can carry out its tenuous task of curbing inflation without triggering a recession, higher interest rates still put downward pressure on equities.
If customers are paying more to borrow money, they can’t buy as many things, so the revenue drops to the company’s profits. Stocks tend to track returns 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 stock market as a whole entered the year looking expensive compared to history. Big tech stocks and other pandemic winners are considered the most expensive, and these are the most penalized when rates rise.
According to Ryan Detrick, chief market strategist at LPL Financial, stocks fell by an average of nearly 35% when the bear market coincided with a recession, compared with a drop of nearly 24% when the economy avoided a recession, according to Ryan Detrick, chief market strategist at LPL Financial. Ryan Detrick, chief market strategist at LPL Financial.
SO I SHOULD SELL EVERYTHING NOW, RIGHT?
If you need money now or want to close your losses, yes. On the other hand, many advisors recommend riding through the ups and downs while remembering that volatility is the price to accept for the stronger returns the stock has provided over the long term.
While dumping the stock will stop the flow, it will also prevent any potential profits. Many of the best days for Wall Street have occurred during a bear market or shortly after the end of the day. That includes two separate days in the middle of the 2007-2009 bear market, where the S&P 500 rallied about 11%, as well as a jump of more than 9% during and shortly after the roughly month-long bear market in 2020.
Advisors recommend only investing in stocks if it’s not needed for several years. The S&P 500 has bounced back from all of its previous bear markets to finally rally to another all-time high. The decade of decline for the stock market after the dot-com bubble burst in 2000 was a notoriously brutal one, but stocks can often regain highs within a few years.
HOW DOES THE LAST BEAR MARKET AND HOW DID THEY GO?
On average, the bear market has taken 13 months to go from peak to trough and 27 months to return to breakeven since World War II. The S&P 500 has fallen an average of 33% during bear markets during that time. The biggest drop since 1945 occurred during the 2007-2009 bear market when the S&P 500 fell 57%.
History shows that the faster an index enters a bear market, the shallower they tend to be. Historically, it took stocks 251 days (8.3 months) to fall into a bear market. When the S&P 500 fell 20% at a faster rate, the index lost an average 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 THE BEAR MARKET ENDS?
Generally, investors look for a 20% gain from the low as well as a sustained gain for a period of at least six months. It took less than three weeks for the stock to rally 20% from its March 2020 lows.
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