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Does a bear market mean a US recession is coming? What to know as Wall Street opens week with heavy losses amid rising inflation

NEW YORK – Wall Street is back on the claws of a market bear as worries about inflation and higher interest rates overwhelm investors.

The Federal Reserve has signaled that it will aggressively raise interest rates to try to control inflation, which is the highest in decades. The war in Ukraine and the slowdown in China’s economy, and investors were forced to reconsider what they are willing to pay for a wide range of stocks, from high-tech companies to traditional automakers. Big swings have become commonplace and Monday was no exception.

The last bear market happened just two years ago, but it would still be the first for those investors who started trading on their phones during the pandemic. Thanks in large part to the Federal Reserve’s emergency actions, stocks have for years seemed to be moving largely in only one direction: upwards. The “buy the dive” rally cry after each market crash has waned after losses and serious sinks in risky assets such as cryptocurrencies. Bitcoin fell below $ 23,000 on Monday. The price of Bitcoin approached $ 68,000 at the end of last year.

MORE: Is there a recession? Bear Market hits Wall Street as stocks, bonds, cryptocurrencies plunge

Here are some common questions about bear markets:

Why is it called a bear market?

Bear market is a term used by Wall Street when an index such as the S&P 500, the Dow Jones Industrial Average or even an individual stock has fallen 20% or more from a recent high for an extended period.

Why use a bear to represent a market downturn? The bears are hibernating, so the bears represent a declining market, said Sam Stovall, chief investment strategist at CFRA. Instead, Wall Street’s nickname for a rising stock market is an upward market because bulls are charging, Stovall said.

The S&P 500, Wall Street’s main health barometer, fell 3.9%. It is 21.8% below its record set earlier this year and now in a bear market.

The Dow Index sank 2.8% and the technologically heavy Nasdaq composite, already in the bear market, fell 4.7%.

The most recent bear market for the S&P 500 lasted from February 19, 2020 to March 23, 2020. The index fell 34% in this one-month period, the shortest bear market ever.

What bothers investors?

The No. 1 enemy of the market is interest rates, which are rising rapidly as a result of high inflation affecting the economy. Low interest rates act as steroids for stocks and other investments, and Wall Street is now retiring.

The Federal Reserve has taken an aggressive turn away from supporting financial markets and the economy with historically low interest rates and is focusing on fighting inflation. The central bank has already raised its key short-term interest rate from a record low to near zero, which has encouraged investors to transfer their money to more risky assets such as stocks or cryptocurrencies for better returns.

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Last month, the Fed signaled additional interest rate hikes twice the usual amount likely in the coming months. Consumer prices are at their highest level in four decades, up 8.6% in May from a year ago.

Planning moves will slow down the economy making borrowing more expensive. The risk is that the Fed could cause a recession if it raises interest rates too high or too fast.

Russia’s war in Ukraine has also pushed up inflation by pushing up commodity prices. And worries about China’s economy, the world’s second largest, have weighed heavily.

So, should we just avoid the recession?

Even though the Fed can complete the delicate task of reducing inflation without causing a recession, higher interest rates are still putting downward pressure on equities.

If customers pay more to borrow money, they can not buy so many things, so less revenue flows into a company’s end result. Shares tend to track earnings over time. Higher interest rates also make investors less willing to pay high stock prices, which are more risky than bonds when bonds suddenly pay more interest thanks to the Fed.

Critics say the overall stock market has entered a year that looks more accurate than history. The big tech stocks and other pandemic winners were considered the most expensive and these stocks were punished more as the rates went up. But the pain is widespread, with retailers signaling a change in consumer behavior.

MORE: JPMorgan Chase CEO warns of a financial “hurricane” approaching.

Shares have fallen nearly 35% on average when a bear market falls into recession, compared with a drop of almost 24% when the economy avoids a recession, according to Ryan Detrick, head of market strategy at LPL Financial.

So I have to sell them all now, right?

If you need money now or want to lock in the losses, yes. Otherwise, many advisors suggest overcoming the ups and downs, while remembering that fluctuations are the price of acceptance for the strongest returns that stocks have offered in the long run.

While dumping stocks would stop the bleeding, it would also prevent any potential gains. Many of Wall Street’s best days were either during a bear market or just after it ended. This includes two separate days in the middle of the bear market 2007-2009, where the S&P 500 rose about 11%, as well as jumps of more than 9% during and shortly after the almost monthly flight market of 2020.

Advisors suggest investing money in stocks only if they are not needed for several years. The S&P 500 returned from each of its previous flight markets to eventually rise to another all-time high.

The declining decade for the stock market after the dot-com bubble burst in 2000 was a notoriously brutal development, but stocks were often able to recover high within a few years.

How long do bear markets last and how deep do they go?

On average, bear markets took 13 months to cross from the peak to the bottom and 27 months to return to the deadlock from World War II. The S&P 500 index has fallen by an average of 33% during the bear markets during that period. The biggest drop since 1945 was in the bear market 2007-2009, when the S&P 500 fell 57%.

History has shown that the faster an index enters a bear market, the shallower it tends to be. Historically, stocks took 251 days (8.3 months) to fall into a bear market. When the S&P 500 has fallen 20% in faster clips, the index has lost an average of 28%.

The largest bear market lasted 61 months and ended in March 1942. It reduced the index by 60%.

How do we know when a bear market has ended?

Investors are generally looking for a 20% gain from a low as well as sustained gains for at least a six month period. It took less than three weeks for stocks to rise 20% from their low in March 2020.

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Veiga reported from Los Angeles.

Copyright © 2022 by the Associated Press. All rights reserved.

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Does a bear market mean a US recession is coming? What to know as Wall Street opens week with heavy losses amid rising inflation Source link Does a bear market mean a US recession is coming? What to know as Wall Street opens week with heavy losses amid rising inflation

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