What a bear market means
NEW YORK — Wall Street is opening the week with more losses, and the S&P 500 has fallen to a level that market observers consider to be a bear market.
Rising interest rates, high inflation, the war in Ukraine and a slowdown in China’s economy have led investors to reconsider what they’re willing to pay for a wide range of stocks, from highflying tech companies to traditional automakers. Big swings have become commonplace and Monday appears to be no exception.
The last bear market happened just two years ago, but this would still be a first for those investors who got their start trading on their phones during the pandemic. Thanks in large part to extraordinary actions by the Federal Reserve, stocks have for years seemed to go largely in only one direction: up.
The “buy the dip” rallying cry after every market slide has grown more faint after stinging losses and severe plunges in risky assets like cryptocurrencies. Bitcoin tumbled another 12% and fell below $24,000 early Monday. The price for Bitcoin neared $68,000 late last year.
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 most recent bear market for the S&P 500 ran from February 19, 2020 through March 23, 2020. The index fell 34% in that onemonth 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.
Last 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 8.6% in May 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.
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.