What is a Bear Market; what does it mean for investors?

What Does a Bear Market mean for Investors, Consumers, and the Economy?

If you invested pandemic-era gains into the stock market, or own a 401(k) plan, get ready for an anxiety-inducing ride. For the first time in nearly two years, the stock market crossed into bear market territory this week as inflationary concerns have sent the S&P 500 spiraling down more than 20% from its record high in early January.

The grim milestone marks yet another low point for Wall Street, which a sharp selloff of stocks has rocked in recent months. On Monday, the S&P 500 tumbled nearly 4% as all but five of its components ended the day with losses. Stocks continued to fall on Tuesday but turned upward following Wednesday's Federal Reserve meeting, where policymakers raised interest rates by three quarters in a continued effort to fight inflation.

It's unknown how long the bear market will last, but historical examples can shed some light on what to expect. Here's what you need to know.

What is a Bear Market?

Wall Street uses the "bear market" term to describe a sustained period when the equity markets are down at least 20% from their recent peaks. Passing the 20% threshold on Monday for the S&P 500 index typically indicates widespread pessimism about the health of the U.S. economy and negative investor sentiment.

Such steep downturns are relatively rare, only 14 times since World War II, including this one. Once previous bear markets had begun, it took an average of 19 months for stock prices to stop falling, according to an LPL Research analysis. But some take less time. The last bear market carried on for only 33 days, from mid-February to late March of 2020, at the start of the Covid-19 pandemic—the shortest bear market since World War II.

The most recent sustained bear market lasted 17 months, beginning in 2007 at the start of the financial crisis, and resulted in the S&P 500 dropping by 51.9%. Another sustained bear market emerged in late 2000 when the dot-com bubble burst, causing many tech companies to go under. It lasted around two years.

How did we get to a Bear Market?

After producing double-digit returns during the pandemic, the stock market took a sharp turn in early 2022 as the economy reckoned with supply chain breakdowns, a war in Ukraine, record inflation, rising interest rates, and recovery from the pandemic. All of these factors reinforced investor angst and contributed to the bear market.

With inflation at its highest levels in 40 years, fueled by rising food and energy prices and the war, the Federal Reserve raised interest rates for the first time since 2018 in an attempt to get prices under control. Such aggressive moves from the Fed tend to make investors anxious, making borrowing more expensive for corporations and households, stifling economic growth, and potentially leading to a recession. A higher-than-expected inflation report on Friday also helped trigger the bear market, as it raised fears the Fed would need to bump up interest rates even more aggressively this year.

But Wall Street had been expecting this moment for some time, so it was no surprise to market watchers and analysts that the S&P 500 dropped more than 20% on Monday since its peak.

Is the U.S. headed for a recession?

Bear markets don't always lead to recession, but they can indicate that one is coming. They can also help predict other kinds of economic signals, like treasury bond yields or stagflation (when prices rise while economic growth slumps).

But it's complicated. Market watchers have different opinions on whether the economy is headed for recession. Some say it would be unlikely for a recession to start when unemployment is near its all-time low, and consumers continue to spend. Others think a recession is inevitable, especially as Russia's invasion of Ukraine wages on and inflation continues to rise.

What should investors do?

Investors may want to pull their money from the stock market to avoid further losses, but for some, that might be the wrong strategy, Hill says. Bear markets have historically been an opportune time for investors to accumulate wealth over the long term, as stock prices are lower.

Deschutes Investment Consulting CEO MacGregor Hall states:

"Some Bond funds now yield more than 6%, and you can receive that in cash each month, so this rate increase has had a silver lining for some retired investors. Even one-year treasury bonds pay nearly 3% as of today. Bond prices have come down at the sharpest rate in history, and yields have gone up due to very high inflation. Ultimately, this is a good thing, for it allows more accurate pricing of risk assets. Before this and during the last three years, the Federal reserve had blinded market pricing by flooding it with cash. This flood of money is no longer the case and a positive thing long-term, but very messy in the short run. The stock market will also accurately reflect prices and start its way back up when investors are clearer on what they should pay for stocks. History shows this turn will be well ahead of when it seems the coast is clear, so try to sit tight, be patient and keep your perspective."

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Source:  Nik Popli, "What a Bear Market Means for Consumers, Investors and the U.S. Economy" Time (website) June 15, 2022, accessed June 16 2022, https://time.com/6187703/bear-market-wall-street-recession/