A bear market may be on the horizon — here’s what that means
NEW YORK — Investors on Wall Street need a place to hide.
The stock market’s skid this year has pulled the S&P 500 close to what’s known as a bear market. Rising interest rates, high inflation, the war in Ukraine and a slowdown in China’s economy have caused investors to reconsider the prices they’re willing to pay for a wide range of stocks, from high-flying tech companies to traditional automakers.
The last bear market happened just two years ago, but this would still be a first for those investors that got their start trading on their phones during the pandemic. For years, thanks in large part to extraordinary actions by the Federal Reserve, stocks often seemed to go in only one direction: up. Now, the familiar rallying cry to “buy the dip” after every market wobble is giving way to fear that the dip is turning into a crater.
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 percent 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 S&P 500 index slipped 22.89 points Thursday to 3,900.79. It’s now down 18.7 percent from its high of 4,796.56 on Jan. 3. The Nasdaq is already in a bear market, down 29.1 percent from its peak of 16,057.44 on Nov. 19. The Dow Jones Industrial Average is more than 15 percent 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 percent in that one-month 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 week, 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 8.3 percent in April 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.
Russia’s war in Ukraine has also put upward pressure on inflation by pushing up commodities prices. And worries about China’s economy, the world’s second largest, have added to the gloom.
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.