As investors increasingly worry about inflationary and higher interest rates, Wall Street has fallen into a bear market.
The US Federal Reserve Bank has indicated it will push up interest rates as it struggles to contain the highest inflation the country has seen in decades. Uncertainty caused by Russia’s invasion of Ukraine and the slowdown in China’s economy has also sent share prices down in sectors from technology to car manufacturing. Increasing changes in the value of stocks become more common.
The last time the US entered bear market territory was about two years ago. The Federal Reserve’s aggressive action throughout the pandemic has kept equities on the upside, but significant losses in high-risk assets like cryptocurrencies have damaged confidence. of investors. Near the end of 2021, Bitcoin is valued at nearly $68,000. As of Monday, that value has dipped below $23,000.
Here’s more information on the “bear market”.
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Why the term ‘bear market’?
A bear market is used to describe when a stock index such as the S&P 500 or the Dow Jones Industrial Average drops 20% for a sustained period of time following recent highs.
Sam Stovall, a chief investment strategist at CFRA, told The Associated Press that the term “bear market” is used because bears are hibernating, representing market has slowed down or stopped moving forward. The term “bull market” is used to describe the opposite: a market that is bullish going forward.
In the US, the S&P 500 is considered an important indicator of Wall Street confidence, or its lack in the market. That index fell nearly 4% on Monday and is 20% below the record high it hit earlier this year.
The Dow Jones fell nearly 3% on Monday and the Nasdaq, consisting largely of Tech-related stocksdown nearly 5%.
The S&P 500’s most recent bear market was also the shortest: from February 19, 2020 to March 23, 2020, the index fell nearly 35%.
Why are investors worried?
The main cause for concern among investors is interest rates, which have been steadily rising to counter high inflation, which is taking a toll on the economy. If a low rate tends to make a stock go up, a higher rate can have the opposite effect.
The Federal Reserve, which was focused on supporting markets during the pandemic, has now begun to fight rising inflation. Record-low interest rates have made it easier for investors to move money into less stable assets like stocks and cryptocurrencies, in the hope of a higher return due to the riskier nature of the investment. .
The near-zero interest rates are now coming to an end. Last month, the Fed indicated that new rate hikes were likely in the next few months and could be more than double the normal rate. Consumer prices have increased by nearly 9% from May 2021 and now the highest level in 40 many years.
By making it more expensive to borrow money, a rising exchange rate slows down the economy. This may help curb inflationbut also comes with the risk of causing a recession if the exchange rate rises too much or too quickly.
Rising commodity prices were also pushed up by Russia’s invasion of Ukraine, contributing to inflation. Worry about Chinese economysecond largest in the world, is also the source of a deteriorating outlook from investors.
Avoid recession?
While the Fed will try to balance curb inflation With the need to avoid sparking an economic downturn, a rising exchange rate is likely to push stocks lower.
If it has to pay more to borrow money, consumers can’t buy as many things and a company’s revenue can drop. If the stock tends to keep up with earnings, the higher ratio also makes the share price rise less attractive. Less risky assets, such as bonds, also pay more due to rising Fed interest rates.
Shares of big tech companies and other sectors that have performed well during the pandemic have entered their high-priced year and are now likely to see some of the steepest declines as interest rates rise. But retailers, noticing a change in consumer behavior, could also be affected.
The bond market is also showing signs of a possible recession. Yields on 2-year Treasuries temporarily outperformed 10-year Treasury yields. That reversal, with higher yields on shorter-term bonds, is often seen as an indicator of a recession, although the timing for such a downturn is less certain.
According to the AP, Ryan Detrick, director of market strategy at LPL Financial, said that when the bear market and Depression come together, stocks fell on average usually about 35 percent. As the economy manages to avoid a recession, that number drops to about 24 percent.
Should I sell now?
While many advisors have said that breaking through lows and highs is part and parcel of investing, stocks tend to provide high returns over the long term. However, for those who are in need of money or are looking to close their losses, the answer is yes.
Eliminating the stock can help prevent further losses, but comes with the risk of losing potential future profits. Usually, a bear market or the days after, take a look at some of the best days for Wall Street. For example, in the middle of the 2007-2009 bear market, there were two separate days when the S&P 500 rallied about 11%. During and after the 2020 bear market, which lasted about a month, there were also jumps of more than 9%.
However, the advisors recommend investing more in stocks only if the money won’t be needed for several years, allowing the market time to get out of the bear market and regain its value. , then continued to new record highs.
Even in the 10-year period after the dot-com bubble burst, a particularly difficult period, stocks often peaked within a few years.
How long will the bear market last? How bad will it get?
Since World War II, bear markets have typically taken 13 months to go from highs to lows and 27 months to get back. previous value. The S&P 500 has fallen an average of 33% during bear markets over the same period. The steepest decline since World War II occurred during a bear market that lasted from 2007 to 2009, when the S&P 500 fell 57%.
Historically, rapid bear markets tend to be shallower, and share it usually takes a little more than eight months to get into a bear market. During a time when the S&P fell 20% faster, the index’s average loss was 28%.
The longest bear market ended in March 1942 after just over 5 years, sending the index down 60%.
When can I be sure that the bear market is over?
Investors looking for consistent profit over a six-month period and up 20 percent from the low. After the March 2020 low, for example, it took less than three weeks for stocks to rise 20%.
