Bear market explained: What you should know after S&P 500 plummets

view original post

All eyes were on Wall Street Tuesday, one day after the S&P 500 entered its latest bear market, leaving investors overwhelmed by the short- and long-term implications of increasing interest rates and inflation worries.

>> Read more trending news

Understanding the factors at play and remaining focused on long-term strategies, however, can help even the least-experienced investor avoid panic as the downward trend grips portfolios and message boards nationwide.

Why do we call it a bear market?

  • While a bull market encourages buying as share prices rise, a bear market emerges when an index, such as the S&P 500 or Dow Jones Industrial Average, falls 20% or more from a recent high for a sustained period of time.
  • Think of the bull’s horns as “up” and an attacking bear’s claws as “down,” and you get the picture.

What happened Monday?

  • The S&P 500 fell 3.9%, which may not sound bad, but couple it with the 0.5% slide by midday Tuesday, and the index sits at 22.2% below its record set earlier this year, according to The Associated Press.
  • The Dow dropped 2.8%.
  • The Nasdaq composite sank 4.7%.

How bad was Monday’s decline historically?

  • The longest bear market in U.S. history lasted 61 months, cut the index by 60% and ended in March 1942.
  • The biggest decline since 1945 occurred in 2007-2009 when the S&P 500 fell 57%.
  • The most recent S&P 500 bear market – and shortest on record – ran from Feb. 19, 2020, through March 23, 2020, when the index sank 34% during that one-month period.
  • Stocks tend to drop by roughly 36% during bear markets and rise by about 114% during bull markets, CNBC reported.
  • Bear markets tend to last only about one-third the time of bull markets, or an average of 289 days vs. 991 days, the network reported.

What is driving the market decline?

  • The Federal Reserve indicated in May that rate increases nearly twice the typical amunt can be expected.
  • Meanwhile, consumer prices have reached their highest level in four decades, rising 8.6% in May compared with one year ago, according to the AP.

How will the rate increases affect the average consumer?

  • Hiking interest rates makes it more expensive to borrow money.
  • If rates rise too quickly, they could trigger a recession.
  • Ryan Detrick, chief market strategist at LPL Financial, told the AP that stocks have historically declined, on average, nearly 35% when a bear market coincides with a recession but only about 24% when a recession is avoided.
  • Charging borrowers more means they buy less, so companies collect less revenue.
  • Stock prices are directly linked to those revenues over time.

What makes this bear market different?

  • New investors who only began trading during the COVID-19 pandemic are getting their first taste of a sustained slide.

Is selling now a bad move?

  • If you can afford to leave your money tied up in stocks for several years, history is on your side. The S&P 500 has come back from every one of its prior bear markets to eventually rise to another all-time high, according to the AP.
  • First and foremost, don’t panic.
  • Don’t allow emotion to override sound investment principles.

When will this end?

  • A 20% gain from a low point and sustained gains over at least a six-month period indicate a recovery.
  • It took less than three weeks for stocks to rise 20% from their low in March 2020, the AP reported.

What are investment experts saying?

  • Scott Nations, president of the financial engineering firm NationsShares and author of “The Anxious Investor: Mastering the Mental Game of Investing,” told CNBC that it’s human nature to “overreact” to bad news.
    • “It’s a human tendency that is probably evolutionary in nature, from a time when not reacting could be an existential risk and overreacting had relatively little cost. But our world has changed and we know it’s impossible to time the market, so selling because the market has dropped and you think the market is going to fall further is a mistake,” he advised.
    • “If you’re a long-term investor, you should be rejoicing. You’re going to put money to work now and regularly during that period and you get to buy at a discount. Try changing your point of view. Not all investors will be able to but it’s a useful exercise,” Nations told the network.
  • Los Angeles-based Wedbush Securities recommends putting a greater focus on quality stocks during a bear market, specifically seeking out companies with “strong business models and healthy balance sheets” that are built for the long-term, GOBankingRates reported
  • According to GOBankingRates, Marta Norton, chief investment officer for the Americas at Morningstar Investment Management, recommended in a recent column that branching out beyond stocks and bonds can help balance your portfolio.
    • “(Hedge-fund-like strategies) offer balance to your portfolio without the risk that some parts of fixed-income markets face,” Norton wrote, adding, “You want more consistent, steady performance that’s not driven by the same factors driving fixed income or equities.”
    • Norton also recommended scouting companies with healthy balance sheets and manageable debt during the bear market and pouncing once the prices come down. “The Warren Buffett maxim should apply: Be greedy when others are fearful, and fearful when others are greedy,” she wrote.
  • According to GOBankingRates, author and personal finance expert John Waggoner advised investors in a recent column for AARP to keep their retirement age in mind because younger investors have more time to make back losses, and that changes after 50.
    • “If you’re 50 years old and plan to retire in 15 years, your best bet may be to keep socking away money in your 401(k) or IRA in the same proportions as you have been,” he wrote.

The Associated Press contributed to this report.