What can we expect if the S&P 500 enters a bear market?

0
13


With investors increasingly concerned about inflation and higher interest rates, Wall Street has entered a bear market.

The US Federal Reserve bank has indicated it will raise interest rates as it struggles to contain the highest inflation the country has seen in decades. The uncertainty created by Russia’s invasion of Ukraine and the slowdown in China’s economy has also led to falling stock prices in sectors from technology to automakers. Increasingly volatile changes in the value of stocks are more common.

The US last entered bear market territory about two years ago. Aggressive action by the Federal Reserve during the pandemic kept stocks on an upward trajectory, but significant losses in risky assets like cryptocurrencies have hurt investor confidence. By the end of 2021, Bitcoin was valued at nearly $68,000. By Monday, that value had fallen to less than $23,000.

Here is more information about “bear markets”.

Why the term ‘beer market’?

A bear market is used to describe when a stock index such as the S&P 500 or the Dow Jones Industrial Average falls 20 percent over a sustained period of time after a recent high.

Sam Stovall, a chief investment strategist at CFRA, told the Associated Press that the term “bear market” is used because bears are hibernating, representing a market that has slowed or stopped moving forward. The term “bull market” is used to describe the opposite: a market that is moving forward.

In the US, the S&P 500 is seen as a key indicator of Wall Street’s confidence, or lack thereof, in the market. That index fell almost 4 percent on Monday and is more than 20 percent below the record reached earlier this year.

The Dow Jones fell nearly 3 percent on Monday and the Nasdaq, which is largely made up of technology-related stocks, fell nearly 5 percent.

The most recent bear market for the S&P 500 was also the shortest: between February 19, 2020 and March 23, 2020, the index fell nearly 35 percent.

Why are investors concerned?

The main cause for concern among investors is interest rates, which are steadily ticking upwards to combat the high levels of inflation plaguing the economy. If low rates tend to make stocks rise, higher rates can have the opposite effect.

The Federal Reserve, which focused on supporting the markets during the pandemic, has now focused on fighting rising inflation. The record low interest rates had made it easier for investors to shift money into less stable assets like stocks and cryptocurrency, in hopes of higher returns due to the riskier nature of the investment.

Those near-zero interest rates are now coming to an end. Last month, the Fed indicated that further rate hikes are likely to occur in the coming months, reaching as much as double the normal rate hikes. Consumer prices have risen nearly 9 percent since May 2021 and are now at about the highest level in 40 years.

By making the cost of borrowing more expensive, rising interest rates will slow the economy. This can help curb inflation, but also carries the risk of a recession if interest rates rise too much or too quickly.

Rising commodity prices have also been pushed up by the Russian invasion of Ukraine, contributing to soaring inflation. Concerns over the Chinese economy, the world’s second largest, also contributed to a deteriorating investor outlook.

Avoid a recession?

While the Fed will try to strike a balance between controlling inflation and the need to avoid an economic downturn, rising interest rates are likely to push stocks lower.

If it costs more to borrow money, consumers will not be able to buy as much stuff and a company’s revenues may decrease. If stocks tend to track earnings, higher rates also make the high price of stocks less attractive. Less risky assets, such as bonds, are also paying more due to the Fed’s rising interest rates.

Stocks for major tech and other sectors that have done well during the pandemic entered the year with high prices and are now likely to see some of the steepest declines as interest rates rise. But retailers, who feel a shift in consumer behavior, can also suffer.

The bond market is also seeing signs of a possible recession. Two-year government bond yields temporarily outperformed 10-year government bond yields. That turnaround, with higher yields for more short-term bonds, is generally seen as an indicator of a recession, although the timeline for such a downturn is less certain.

According to the AP, Ryan Detrick, chief market strategist at LPL Financial, has said that when a bear market and a recession come together, the average decline in stocks is usually about 35 percent. When the economy manages to avoid a recession, that number drops to about 24 percent.

Should I sell now?

While many advisors have said that riding the lows and highs is an essential part of investing, stocks typically offer strong returns over the long term. However, for those who need money right now, or want to cash in on their losses, the answer is yes.

Throwing out stocks can help prevent further losses, but carries the risk of losing potential future gains. Often, bear markets, or the days after, see some of the best days for Wall Street. For example, in the midst of the 2007-2009 bear market, there were two separate days when the S&P 500 jumped about 11 percent. During and after the 2020 bear market, which lasted about a month, there were also jumps of more than 9 percent.

However, advisers are only suggesting further equity investments if that money won’t be needed for several years, giving the market time to emerge from bear markets and regain its value, then move to new all-time highs.

Even during the ten-year period after the internet 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 high to low and 27 months to regain their previous value. The S&P 500 index has fallen an average of 33 percent during bear markets over the same period. The steepest downturn since World War II occurred in the bear market that lasted from 2007 to 2009, when the S&P 500 fell 57 percent.

Historically, bear markets that move quickly tend to be more superficial, and stocks have usually taken a little over eight months to fall into a bear market. In times when the S&P fell 20 percent faster, the average loss for the index was 28 percent.

The longest bear market ended in March 1942 after just over five years, with the index falling 60 percent.

When can I be sure the bear market is over?

Investors are looking for consistent gains over a six-month period and a 20 percent rise from a low. For example, after a low in March 2020, it took less than three weeks for stocks to gain 20 percent.



Source link

LEAVE A REPLY

Please enter your comment!
Please enter your name here