By STANCHOE and ALEX VEIGA
New York (AP) — Wall Street is back on the bear market as concerns over inflation and high interest rates overwhelm investors.
The Federal Reserve has suggested aggressively raising interest rates to curb the highest inflation in decades. The war in Ukraine and the slowdown in the Chinese economy have forced investors to rethink what they are willing to pay for a wide range of stocks, from tech companies to traditional car makers. Big swings became commonplace, and Monday was no exception.
The last bear market occurred just two years ago, but this is the first time for investors who started trading on mobile phones during a pandemic. Stocks seemed to be moving primarily in one direction for many years, largely due to the extraordinary behavior of the Federal Reserve. The “buy dip” rally screams after all market slides have weakened after stabbing the loss and severe plunge of risky assets like cryptocurrencies. Bitcoin fell below $ 23,000 on Monday. Bitcoin prices were close to $ 68,000 at the end of last year.
Here are some frequently asked questions about the bear market.
Why is it called the bear market?
Baremarket is the term used on Wall Street when indices such as the S & P 500, the Dow Jones Industrial Average, and even individual stocks have fallen by more than 20% over a long period of time from their recent highs.
Why do you use bears to express the market downturn? Sam Stovall, CFRA’s chief investment strategist, says bears are hibernating and therefore represent a recessing market. In contrast, the soaring stock market Wall Street nickname is the bull market because the bulls rush, Stover said.
Wall Street’s leading health barometer, the S & P 500, fell 3.9% on Monday. As of noon on Tuesday, the index fell another 0.5%, 22.2% below the record set earlier this year and is now in a bear market.
The 30 Dow Jones Industrial Averages fell 2.8% on Monday, while the tech-heavy Nasdaq Composite Index, which was already in the bear market, fell 4.7%.
The latest bear market for the S & P 500 ran from February 19, 2020 to March 23, 2020. Over the past month, the index has fallen 34%, making it the shortest bear market in history.
What bothers investors?
The biggest enemy of the market is interest rates, which are rising rapidly as a result of high inflation hitting the economy. Low interest rates act like stocks and other investment steroids, and Wall Street is currently withdrawing.
The Federal Reserve is actively shifting from supporting financial markets and the economy with record low interest rates, focusing on the fight against inflation. Central banks have already raised key short-term interest rates from near zero, a record low, encouraging investors to move funds to higher-risk assets such as stocks and cryptocurrencies for better returns. I did.
Last month, the Fed suggested that it could raise rates twice as much as usual in the coming months. Consumer prices have been at their highest levels in 40 years, rising 8.6% in May compared to a year ago.
Design moves will slow the economy by making borrowing more expensive. The risk is that if the Fed raises interest rates too high or too fast, it can cause a recession.
The Russian war in Ukraine also put upward pressure on inflation by pushing up commodity prices. And concerns about China’s economy, the second largest in the world, are added to the darkness.
So do we need to avoid a recession?
Higher interest rates still put downward pressure on equities, even if the Fed could get rid of the delicate task of pushing down inflation without causing a recession.
If customers are paying more to borrow money, they can’t buy that much, so less revenue flows into the company’s revenue. Stocks tend to track profits over time. With higher interest rates, investors are less willing to pay higher prices for higher-risk stocks than bonds if the Fed suddenly pays more interest on the bond.
Critics said the overall stock market has entered a year that looks expensive to history. Big tech stocks and other pandemic winners are considered the most expensive, and as interest rates rise, these stocks have been the most punished. However, retailers are showing changes in consumer behavior and the pain is widespread.
The bond market also has recession jitter. Overnight, yields on 2-year government bonds temporarily exceeded yields on 10-year government bonds. Short-term and long-term yield reversals have been a reliable indicator of a recession for years, but a recession can last from a few weeks to a year or two.
According to Ryan Detrick, chief market strategist at LPL Financial, equities fell by an average of almost 35% when the bear market coincided with a recession, but equities fell by almost 24% when the economy avoided a recession. It has fallen.
So I should sell everything now, right?
If you need money right now, or want to save money, yes. If not, many advisors suggest getting through the ups and downs, remembering that the volatility is an admission fee for a stronger return that the stock has offered in the long run.
Discarding the stock will stop the bleeding, but it will also prevent potential benefits. The best days for Wall Street were either in the bear market or shortly after the bear market was over. This includes two days in the middle of the bear market from 2007 to 2009, when the S & P 500 surged about 11%, and a leap of over 9% during and shortly after the bear market in 2020, which lasted about a month. It will be.
Advisors suggest putting money in stock only if it isn’t needed for a few years. The S & P 500 has returned from all previous bear markets and eventually climbed to a record high.
The stock market slump after the 2000 dot-com bubble collapse was a notorious and brutal growth, but stocks were often able to regain highs within a few years.
How long will the bear market last and how deep will it go?
Since World War II, on average, the bear market has taken 13 months to return from its peak to the trough and 27 months to return to the break-even point. The S & P 500 Index fell by an average of 33% in the bear market at the time. The biggest decline since 1945 occurred in the bear market in 2007-2009, when the S & P 500 fell 57%.
History shows that the earlier the indexes enter the bear market, the shallower they tend to be. Historically, stocks took 251 days (8.3 months) to fall into the bear market. When the S & P 500 fell 20% on a faster clip, the index lost an average of 28%.
The longest bear market lasted 61 months and ended in March 1942. Reduced the index by 60%.
How can I know that the bear market is over?
In general, investors want a profit of 20% from the lowest point and a sustainable profit for at least 6 months. It took less than three weeks to rise 20% from the March 2020 lows.
Veiga reported from Los Angeles.
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The S & P 500 is in the bear market.This is what it means – Daily Local
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