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Bear Market: How Long Will Stocks Fall and Could This Cause a Recession?

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What is happening

The S&P 500 has fallen more than 20% from its peak in early 2022, resulting in the first bear market since 2020.

why is it important

A sharp decline in a broad stock index suggests a sustained market downturn, seen by many investors as a sign of a possible impending recession.

The stock market was hit hard in June when the S&P 500, an index of the top 500 publicly traded U.S. companies, fell to its lowest level since March 2021.

On June 13, the S&P 500 closed at 3,749.91 points, down from a high of 4,818.62 on January 4, a decline of 22%. Major players like Amazon, Apple and Meta have all hit their market value.

As of June 23, the index stood at 3,795.73, still 21.2% below January.

The drop put stocks in bearish territory – an extended period of downward price trend – for the first time since the start of the COVID-19 pandemic. (In contrast, a bull market occurs when stock prices remain on an upward trajectory.)

We’ve had many bear markets in the past, but the current situation is getting more attention due to soaring inflation and other factors that have some experts worried about a recession.

Here’s what you need to know about bear markets, including why they happen, how long it could last, and what it means for the economy.

What is a bear market?

When a broad stock index is down 20% or more from recent highs for at least two months, it is considered a bear market.

Since 1928, the S&P 500 has seen 26 bear markets, according to Hartford Funds.

A stockbroker faces a bear

The S&P 500 index remained more than 20% below its January 2022 peak, resulting in the first bear market in two years.

DNY59/Getty Images

The opposite of a bear market is a bull market, when there is a rise of 20% or more in a broad market index like the S&P 500 or the Dow Jones Industrial Average over a period of at least two month.

There have also been 27 bull markets since 1928, according to Hartford Funds, with an average of 991 days or 2.7 years.

How long does a bear market typically last?

It depends on the formula you are using. According to investment analyst firm Seeking Alpha, the average length of an S&P 500 bear market since the 1920s has been 289 days, or about nine and a half months. (The shortest, in March 2020, when the COVID-19 pandemic began in the United States, lasted only a month.) On average, the S&P 500 fell about 36% during these periods. of decline.

But more recently, the 14 bear markets since World War II have lasted an average of 359 days, or almost a year, according to Bespoke Investment Group.

Analyzing all bear markets since World War II, Ben Carlson of Ritholtz Wealth Management found that it takes 12 months to go from peak to trough, or from the end of a period of growth to a low.

This means that the current bear market would bottom out in early 2023, a year after January’s peak.

Does a bear market mean a recession is on its way?

A bear market can often, but not always, go hand in hand with a recession. In the 12 recessions since World War II, nine have been accompanied by bear markets, Reuters reported.

But there have been 26 bear markets since 1928 and only 15 recessions.

Recession-related bear markets are typically longer (495 days vs. 198 days) and more severe (a 35% decline in the S&P 500 vs. 28.2%), according to Bespoke Investment Group.

What causes a bear market?

Many factors can fuel a bear market. Among those relevant to our current situation are a weakened economy and the ongoing invasion of Ukraine and its impact on the geopolitical landscape.

The shutdown of parts of the economy during the pandemic could also be a factor, as could the Federal Reserve’s decision to raise interest rates to curb inflation. After raising them by a quarter of a percentage point in March and by half a point in May, the Fed raised interest rates by three-quarters of a point in June.

bear and bull

The average duration of an S&P 500 bear market since the 1920s is about nine and a half months.

ATU/Getty Images

Where does the term “bear market” come from?

The terms “bear market” and “bull market” date back to the early 1700s in London’s Exchange Alley, a precursor to the modern London Stock Exchange, but there are several theories as to their origins.

Traders who engaged in naked short selling — or selling stocks that weren’t affirmatively proven to exist — were referred to as “bearskin traders,” and later simply “bears.” The suggestion was that they would sell a bear pelt before they even caught the animal.

Another explanation holds that the terms are related to how each animal attacks. A bear will drag its claws down, a metaphor for a market downturn. A bull will thrust its horns upward, suggesting an upward trend in the market.

And yet another theory is that a bear is hibernating, the same way a falling market has gone to sleep, Sam Stovall, chief investment strategist at investment research firm CFRA, told The Associated Press. . A booming stock market is a bull market, according to Stovall, because bulls charge their victims.

The terms were first printed in the 1761 book Every Man His Own Broker, written by economist Thomas Mortimer.