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The US stock market is in bear territory. What does that mean?

Published Jun 15, 2022

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The volatility that has rocked Wall Street since the outset of 2022 manifested with stunning intensity this week, and now a hearty chunk of the pandemic-era gains is gone, taking investors along for the anxiety-inducing ride.

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On Monday, the S&P 500 (index of the top 500 US shares) tumbled nearly 4% to cross into a bear market – meaning the index has lost 20% of its value since its most recent peak – signaling the end of the frenetic stock rally that followed the markets' pandemic-fueled meltdown. And because some view it as a harbinger of recession, it can reinforce investor angst and potentially trigger even deeper losses.

Investors are up against what is likely "the most complex macro backdrop" in a century, according to Dan Ives, managing director of Wedbush Securities, as the economy reckons with the coronavirus crisis, supply chain breakdowns, a war in Ukraine, runaway inflation and rising interest rates.

While no one knows how long a bear market will last, past bears can offer some insight into what it means for the broader economy. Here's why:

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What is a bear market?

A bear market is a loosely defined investing benchmark that has tremendous psychological weight, says Rod von Lipsey of UBS Private Wealth Management. It's worse than a "correction," which is a fall of at least 10%, and underscores that Wall Street is pessimistic and worried that a recession – when the economy contracts for two quarters in a row – may soon follow.

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There is no magic number that automatically triggers further selling. But potentially losing more than 20 cents on every dollar invested – as a bear market indicates – can trigger a certain panic in the mind of the investor, Von Lipsey said. For consumers who put money aside, such a large decline can make a real difference in their life and financial plans.

Bear markets are also significant because any recovery requires substantial growth. For instance, after a 20% loss, the stock market would need to rise by 25% just to break even. Waiting for that to happen can affect someone's ability to retire or other life decisions.

"The amount by which one falls probably has a bigger impact on the confidence of the investor as well as the time-frame required to recover all that was lost," said Sam Stovall, chief investment strategist at CFRA.

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How long do bear markets last?

Nobody knows. But past bear markets offer some clues.

Since World War II, there have been 14 bear markets, including this one. Recoveries take, on average, 23 months to recoup all that was lost during the prior bear market, according to Stovall.

The last bear market – from mid-February to late March of 2020 – lasted only 33 days. Aside from that anomalous downturn, there hasn't been a sustained bear market since 2009, at the end of the financial crisis.

Do bear markets lead to recession?

Not always. While market observers use bear markets as one indicator of a potential recession, they tend to favor other economic signals, like Treasury bond yields, to forecast a downturn.

"While most bear markets have been followed by recessions, this has not always been the case, and for every previous bear market that has occurred over the last century, each was eventually accompanied by a longer and stronger bull market," said Nicole Tanenbaum of Chequers Financial Management.

Americans are facing an array of economic forces that have raised fears of a recession. But those concerns exist alongside other conflicting factors that complicate the picture. The U.S. unemployment rate remains extremely low and consumers have continued to spend, highlighting the strength of the economy. But inflation has stuck around much longer than policymakers initially thought, amplified by Russia's invasion of Ukraine in February.

Why does the S&P 500 matter?

The S&P 500 is an equity index that tracks the performance of 500 large and representative companies, and is a widely used gauge of financial performance over time. Though investors and analysts follow other indexes, the S&P 500 is seen as the best proxy for how Wall Street is doing; so much so that when people refer to the "stock market," they're generally talking about the S&P 500.

The index includes large tech companies such as Apple, Microsoft, and Facebook parent Meta Platforms, along with well-known brands like Berkshire Hathaway, Walmart, Visa and Home Depot. To be added to the list, a company must have a market capitalization of at least $14.6 billion, according to S&P's latest guidelines.

Investors typically see it as a more reliable measure of what's happening in the economy and the stock market compared to other indexes, says Wayne Wicker of MissionSquare Retirement. It tends to be less volatile than the Nasdaq index, which includes a lot of growth-oriented tech stocks.

The S&P 500 index has "a much broader representation of the general economy than the Dow Jones index," Wicker said of the blue-chip index, which represents 30 companies.

I'm an investor. What should I do now?

When markets are chaotic, financial advisers seem to agree on one thing: Don't panic.

"Panic is almost a guarantee to lose," says Michael Farr, a Washington DC-based investment adviser with the wealth management firm Farr, Miller and Washington.

If you want be a successful long-term investor, you should be prepared to "suffer through such periods and endure," Farr says, adding: "I promise that Warren Buffett isn't panicking . . . he's excited to see great companies on sale and thinking about what he can buy."

The first step, says Wicker, is to take a deep breath and assess risks. Today's stock market is very different from last year's. It makes sense to have an investment game plan that takes the current market into account.

If you have a financial adviser or accountant, you should talk to that person immediately, Wicker and Farr said. If you don't, here are some things to keep in mind:

  • The markets tend to improve over the long-term.
  • Don't take drastic moves.
  • Look for ways to diversify.

WASHINGTON POST

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