NEW YORK (AP) – Wall Street opened the week with big losses that put the benchmark S&P 500 at a level considered the so-called bear market.
Rising interest rates, high inflation, the war in Ukraine and the slowdown in the Chinese economy have led investors to reconsider what they are willing to pay for a wide range of stocks, from technology companies. of great flight to traditional car manufacturers. Big changes have become commonplace and Monday was no exception.
The last bear market took place just two years ago, but this would still be the first for those investors who started trading on their phones during the pandemic. Thanks in large part to the extraordinary actions of the Federal Reserve, for years it seems that the actions have only gone in one direction: upwards. The cry for “buy down” recovery after each market crash has faded after sharp losses and severe falls in risky assets such as cryptocurrencies. Bitcoin fell below $ 23,000 on Monday. The price of Bitcoin approached $ 68,000 at the end of last year.
Here are some common questions about bear markets
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WHY IS IT CALLED 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 a single stock has fallen 20% or more from a recent high over a sustained period of time. .
Why use a bear to represent a market crash? Bears hibernate, so bears represent a market that is retreating, said Sam Stovall, CFRA’s chief investment strategist. Instead, Wall Street’s nickname for a growing stock market is a bullish market, because bulls charge, Stovall said.
The S&P 500, Wall Street’s top health barometer, fell 3.9%. It is 21.8% below its record set earlier this year and now in a bear market.
The industrial Dow fell 2.8% and the Nasdaq, which was already in a bear market, fell 4.7%.
The most recent bear market in the S&P 500 ran from February 19, 2020 to March 23, 2020. The index fell 34% in that one-month period, the shortest bear market ever.
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WHAT IS INVOLVING INVESTORS?
The number one enemy of the market is interest rates, which are rising rapidly as a result of high inflation affecting the economy. Low rates are acting as steroids for stocks and other investments, and Wall Street is now going through a downturn.
The Federal Reserve has taken an aggressive turn away from targeting financial markets and the economy at record low rates and is focusing on fighting inflation. The central bank has already raised its key short-term interest rate from its all-time low to near zero, which had encouraged investors to move their money to riskier assets such as stocks or cryptocurrencies for better returns.
Last month, the Fed noted additional rate hikes to double the usual amount that is likely in the coming months. Consumer prices are at their highest level in four decades and rose 8.6% in May compared to a year ago.
Design moves will slow down the economy by making borrowing more expensive. The risk is that 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 raising commodity prices. And worries about China’s economy, the world’s second-largest, have added to the darkness.
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So, should we just avoid a recession?
Even if the Fed can carry out the delicate task of curbing inflation without causing it to fall, higher interest rates still put downward pressure on equities.
If customers pay more to borrow money, they can’t buy so many things, so less revenue flows into the company’s results. Stocks tend to track profits over time. Higher rates also make investors less willing to pay high stock prices, which are riskier than bonds, when bonds suddenly pay more interest thanks to the Fed.
Critics said the stock market in general entered the year looking expensive compared to history. The big tech stocks and other pandemic winners were seen as the most expensive, and those stocks have been the hardest hit as rates have risen. But the pain is spreading widely, with retailers indicating a shift in consumer behavior.
Shares have fallen nearly 35% on average when a bear market coincides with a recession, compared to a nearly 24% drop when the economy avoids a recession, according to Ryan Detrick, chief market strategist at LPL Financial.
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So NOW YOU HAVE TO SELL EVERYTHING, RIGHT?
If you need the money now or want to block the losses, yes. Otherwise, many advisors suggest going through the ups and downs while remembering that changes are the admission price for the strongest returns that long-term stocks have provided.
While stockpiling would stop the bleeding, it would also prevent any potential gain. Many of the best days for Wall Street have been during a bear market or just after the end of one. This includes two separate days in the middle of the 2007-2009 bear market, where the S&P 500 rose by about 11%, as well as jumps of more than 9% during and shortly after the bear market of about a month in 2020.
Advisors suggest putting money into stocks only if they will not be needed for several years. The S&P 500 has returned from all its previous bear markets to another all-time high.
The downward decade for the stock market after the bursting of the bubble point as in 2000 was a notoriously brutal stretch, but stocks have often been able to regain their highs in a few years.
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HOW LONG DO BONE MARKETS LAST AND WHAT DEPTH DO THEY GO?
On average, bearish markets have taken 13 months to go from high to low and 27 months to return to balance since World War II. The S&P 500 index has fallen an average of 33% during bearish markets during this time. The biggest drop since 1945 was in the 2007-2009 bear market, 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 fall in a bear market. When the S&P 500 fell 20% at a faster rate, the index had an average loss of 28%.
The longest bearish market lasted 61 months and ended in March 1942. It reduced the index by 60%.
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HOW DO WE KNOW WHEN A BONE MARKET IS OVER?
Investors generally look for a 20% return from a low point, as well as sustained gains for at least a six-month period. It took less than three weeks for stocks to rise 20% from their March 2020 low.
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Vega reported from Los Angeles. __ Learn more about AP business coverage at