Stocks fell into a so-called bear market on Monday, after an intense sell-off that saw the S&P 500 Index shed 3.9% and fall to its lowest level since March 2021.
But just what is a “bear market”?
The term is used by investors to describe a steep and sustained market downturn. Technically, it’s a drop of 20% or more from recent highs.
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Investors commonly apply the phrase to a broad stock index like the S&P 500 or Dow Jones Industrial Average, but it also works for individual stocks.
The S&P 500 was down more than 21% from its January record when the market closed Monday — the first time since March 2020 that the U.S. stock index closed in bear market territory.
Wall Street is currently spooked by many factors, including high inflation, rising interest rates, war in Ukraine and worries about recession.
Fears are growing that the Federal Reserve may have to be more aggressive to cool inflation than initially expected. To that point, Fed policymakers are entertaining the idea of a 75-basis-point rate increase this week.
There isn’t anything particularly special about the 20% demarcation line used to define a bear market. It’s more a symbolic psychological hurdle for investors. It often portends — but doesn’t cause — a recession.
“It’s a shortcut in language around the financial markets that people use,” Charlie Fitzgerald III, an Orlando, Florida-based certified financial planner, said of bear markets. “The bottom line is, it’s a tough time.”
By comparison, a “bull market” is a period when stocks are surging, which has largely been the case since the Great Recession.
Human emotions are just a difficult thing to predict.Charlie Fitzgerald IIIOrlando, Florida-based certified financial planner
Bear markets are a periodic feature of the stock market. Since World War II, there have been nine declines of 20% to 40% in the S&P 500, and three others of more than 40%, according to Guggenheim Investments. (The analysis doesn’t include 2022.)
On average, stocks took 14 months and 58 months to recover, respectively, after those declines. The S&P 500 slid 34% from Feb. 19 to March 23 in 2020; stocks recovered by mid-August and ultimately swelled 114% through Jan. 3, 2022, the recent record, according to S&P Dow Jones Indices.
It’s impossible to say how long the current downturn will last, Fitzgerald said. “Human emotions are just a difficult thing to predict,” he said.
