May 20, 2022
The benchmark S&P 500 stock index is falling, on course to enter what investors call a bear market. If you’re just tuning in or watching your retirement savings shrink, here’s what you need to know about the grizzly decline.
What is a bear market?
Stocks enter a bear market when widely followed indexes such as the S&P 500 or the Dow Jones Industrial Average sink 20% from their high points. There is nothing official about the determination. The designation is a shorthand way for Wall Street to mark when markets have taken a tumble. It also gives investors a moment to reflect on how the current action in markets compares to previous downdrafts.
The S&P 500 on May 20 was poised to enter a bear market for the first time in more than two years. What this basically means is that stocks have fallen quite a bit, and that decline has gained momentum. Most analysts base their calculations on closing levels of the index, rather than intraday levels.
This is the opposite of a bull market, when an index or security has risen 20% from its recent low.
The Nasdaq Composite, which is driven by technology stocks, has been in a bear market since March. The Dow Jones Industrial Average, which is more weighted to industrial and banking stocks, hasn’t fallen as much as the S&P 500 and so remains further off from bear territory.
How long do bear markets last?
The last bear market was in early 2020, when governments locked down economic activity to slow the outbreak of Covid-19. The Dow returned to a bull market that March after an 11-trading day bear market. The S&P 500 took just 126 trading days to swing from a record to a bear market and back to a new high.
Even with the most recent market turbulence this year, the S&P 500 was still up about 70% from its 2020 low, as of May 20.
Bear markets are rarely that brief. The underpinnings of a new bull market can’t be laid until people are so convinced that stocks can’t rise that the market finally begins to perk up. The bear market between 2007 and 2009 spanned 517 days (including non-trading days), according to Yardeni Research Inc. The prior bear market from 2000 to 2002 lasted 929 days.
Stock markets can also sometimes flirt with bear-market levels without actually reaching them. In both 2011 and 2018, the S&P 500 fell 19% at the trough of deep selloffs. While several sectors, as well as some other indexes, did fall more than 20%, the S&P index didn’t technically hit bear-market territory.
What’s the difference between a bear market and a recession?
Often a bear market precedes a recession. But a bear market just describes a decline in the value of stocks or other securities, while a recession is a general decline in a country’s production of goods and services, measured usually as two consecutive quarters of shrinking growth as determined by the National Bureau of Economic Research.
There have been several bear markets that didn’t coincide with recessions. From the Great Depression through the end of 2020, there have been 17 bear markets, nine of which were accompanied by a recession, according to investment-management firm Invesco. That backs up the late Nobel-prize winning economist Paul Samuelson, who once wrote that Wall Street indexes had predicted nine of the past five recessions.
Why are stocks falling?
Stocks are being hit by a mix of factors. First and foremost is inflation and worries that the Fed’s actions to tame it could tumble the economy into a sharp slowdown, hitting corporate profits, and thus the value of companies on the stock market.
Strong demand from consumers and supply-chain disruptions, made worse by recent Covid-19 lockdowns in some Chinese cities, have boosted prices. Chip shortages have driven higher the cost of electronics. Russia’s war against Ukraine sent energy prices soaring.
Rising prices erode consumers’ spending power as well as weigh on companies’ profitability. Stock markets took another leg down on May 18 after earnings from Target Corp. and Walmart Inc. showed that rising costs eroded earnings.
To contain inflation, the Federal Reserve has begun raising interest rates, which should dampen demand. Higher interest rates increase the rewards for short-term saving in cash and so putting money into things promising rewards in the long run, such as technology stocks, is less attractive. If the Fed raises rates too much, investors also worry they could slow growth to the point of a recession.
What is a correction?
While the Dow Jones Industrial Average has yet to reach a bear market, it has suffered a correction.
A correction is a drop of at least 10% in the price from the most recent peak. While it wipes the value off a stock, bond, currency or commodity, many investors view corrections as a signal to buy at a lower price.
Should I be worried about my 401(k) and retirement savings?
For those nearing retirement, such a decline could be an issue. But over the long history of the stock market, bear markets eventually go away. Solid returns are made by investing when markets are near their lows. After the 2008 financial crisis, stocks entered a bull market for 11 years.
Where did the term ‘bear market’ come from?
At the outbreak of the 2020 bear market, Wall Street Journal columnist Jason Zweig reported about the history of bulls and bears in the world of finance.
He cited Anatoly Liberman, a linguist at the University of Minnesota, who said the use of “bull” and “bear” to refer to financial optimists and pessimists, respectively, originated in Britain in the early 18th century.
“Bull” evoked the bellowing of an eager buyer. “Bear” appears to have come from an early proverbial expression, “to sell the bear’s skin before one has caught the bear”—an apt metaphor for a short sale, in which a trader sells borrowed shares in hopes of buying them back at a lower price.
The terms “bull market” and “bear market,” however, didn’t arise until the 1850s, says lexicographer Barry Popik. Even then, they often referred to only a single day’s action. The 20% threshold for bull and bear markets began to take hold only in the latter 1950s and early 1960s. Use of the terms solidified following strong returns in the 1980s and 1990s.