The bear market has just hit stocks — what does that mean for you and your money?

The stock market’s tumble this year has put the S&P 500 into a bear market — the term for when stocks decline at least 20% from their most recent high.

The index lost 4% on Monday to close at 3,750, putting it 21% below its peak in January.

Wall Street is grappling with the impact of rising interest rates, high inflation and energy costs, the war in Ukraine and a slowdown in China’s economy, prompting investors to reconsider the prices they’re willing to pay for stocks.

Bear market are quite common. The last one occurred two years ago when the U.S. was hit by the pandemic. But this slump could mark the first downturn for younger investors who started trading on their phones during the pandemic, when stocks surged as the economy recovered its footing from the initial COVID-19 shutdown in 2020.

“The financial markets have struggled in their worst start to a year in decades,” John Lynch, chief investment officer for Comerica Wealth Management, said in a June 13 research note.

“Surging inflation, the pivot in Fed policy, and historically pricey equity valuations were on the minds of investors as the year began, but the combination of COVID-19 lockdowns in China and Russia’s invasion of Ukraine has escalated volatility further with investors becoming increasingly concerned about the possibility of global recession sometime within the next year,” he said. Stocks have tended to move in one direction over the last two years: upward. The familiar cry of “Buy the Dip” following market wobbles is now being replaced by the fear that the dip could become a crater.

A fall is not always pleasant, but it’s part of what we have to pay over time for high returns,” stated Brad McMillan (chief investment officer at Commonwealth Financial Network), in a recent research note.

Here are the facts about a bear-market.

What is 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 as a symbol of a market slump According to Sam Stovall (chief investment strategist at CFRA), bears hibernate so they represent a market in retreat. Stovall stated that Wall Street’s name for a rising stock market is “a bull market” because it has bulls charging.

The S&P 500 index was down 1.9% in Friday afternoon trading, putting it 20.3% below its high set on January 3. But stocks recovered by the end of trading at 4 p.m., with the S&P 500 closing up 1 point for the day. Overall, the index is down about 19% from its most recent high in January.

For many investors, the bear market will become official if the S&P 500, Wall Street’s main barometer of health, finishes the day at least 20% down from its peak.

The Nasdaq is already in a bear market, down 31% from its peak of 16,057. 44 on November 19. The Dow Jones Industrial Average is more than 16% below its most recent peak.

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 one-month period, as investors reacted to lockdown orders that closed businesses and kept consumers at home. This is the most bearish market in history.

What should investors be concerned about?

Market enemy No.

The market enemy number one is the interest rates. They are rapidly rising due to the economic crisis. Wall Street has begun to withdraw because low rates are like steroids for stocks, other investments and the economy.

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, which hit a new 40-year record in May.

Last month, the Fed signaled additional rate increases of double the usual amount are likely in upcoming months, part of its plan to make borrowing more expensive and put the brakes on spending by consumers and businesses. But the Fed’s rate increases could lead to a recession. The war in Ukraine also increased inflation, pushing up commodity prices. The gloomy outlook has been exacerbated by concerns about China’s economy.

We just have to prevent a recession.

Economists say the odds of a recession are increasing due to high inflation, which could crimp consumer spending, and the Fed’s rate hikes. Currently, the chances of a recession are about 30%, according to research from Moody’s Analytics and a Wall Street Journal survey of economists. But even if there is no recession, stocks will be under pressure from the Fed’s interest rates hikes.

If customers pay more for borrowing money they are unable to buy as many things, which means less revenue is flowing to the bottom line. Over time, stocks tend to follow profits. Investors are less likely to invest in stocks at higher rates, as they are more risky than bonds. However, bonds suddenly pay more interest due to Fed policy.

Critics said that the stock market overall came into this year looking expensive based upon past history. The most costly stocks were those that are dominated by technology companies and the other pandemic winners. Inflation rates have also made these stocks the worst-affected. Target shares are falling after they reported lower-than-expected profit numbers this week.

Stocks have historically declined almost 35% on average when a bear market coincides with a recession, compared with a nearly 24% average drop when the economy avoids a recession, according to Ryan Detrick, chief market strategist at LPL Financial.

“Going back more than 50 years shows that only once was there a bear market without a recession that lost more than 20% and that was during the Crash of 1987,” Detrick said in a research note.

During other near-bear markets that occurred without a recession, stocks bottomed out at a roughly 19% decline, he added.

Should I sell everything to avoid more losses?

Only if you have the cash now, or want to avoid losing it. Experts say this is the only way. Many advisers recommend that you ride out the volatility and accept the higher returns stocks offer over time.

While dumping stocks could stop the bleeding it also would prevent potential gains. Wall Street has had its best years either in a bear or after a downturn.

“Declines create the conditions for future growth which is often faster than people expect,” McMillan stated.

For instance, in the middle of the 2007-2009 bear market, there were two separate days where the S&P 500 surged roughly 11%, as well as leaps of better than 9% during and shortly after the roughly monthlong 2020 bear market. Advisers recommend that you only invest money in stocks if your investment won’t need to be used for many years. The S&P 500 has come back from every one of its prior bear markets to eventually rise to another all-time high.

The down decade for the stock market following the 2000 bursting of the dot-com bubble was a notoriously brutal stretch, but stocks have often been able to regain their highs within a few years. How long can bear markets last?

On average, bear markets have taken 13 months to go from peak to trough and 27 months to get back to breakeven since World War II. The S&P 500 index has fallen an average of 33% during bear markets in that time. The biggest decline since 1945 occurred in the 2007-2009 bear market when the S&P 500 fell 57%.

History reveals that an index’s entry into a bear markets is slower than one would expect. Historically, stocks have taken 251 days (8.3 months) to fall into a bear market. When the S&P 500 has fallen 20% at a faster clip, the index has averaged a loss of 28%.

The longest bear market lasted 61 months and ended in March 1942 and cut the index by 60%. How do you know when a bear market has ended?

Generally, investors look for a 20% gain from a low point as well as sustained gains over at least a six-month period. It took less than three weeks for stocks to rise 20% from their low in March 2020.

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