What is a bear market and when did the stock market experience the last one?
Wall Street has been taking a beating in 2022 as investors fret over rapid inflation and the steps that the Federal Reserve will take to bring it to bear.
The S&P 500 is officially in a bear market, joining the Nasdaq. Despite taking an almost 900-point loss on Monday, the Dow Jones isn’t quite in the claws of a bear market, yet. The selloff on Monday was sparked by fears that the Federal Reserve will raise interest rates more aggressively than has been signaled when they meet on 14 & 15 June.
Policymakers had voiced the likelihood of a 50 basis-point hike at both the June and July meetings. But an article in the Wall Street Journal raised to prospect of the central bank jacking rates by three quarters of a percent after the May Consumer Price Index report showed US inflation significantly higher than what economists had expected. It would be the first time since 1994 the Fed has bumped up rates that much in a single go.
Also see:
What is a bear market?
Two common terms used by Wall Street are bull and bear markets to talk about the indexes like the S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite rising or falling respectively. A bear market occurs when a market has dropped 20 percent or more from a recent high for a sustained period of time.
According to the Merriam Webster dictionary, the term bear market came first, based on a proverb that cautions against selling “the bear’s skin before one has caught the bear.” The original expression “to sell or buy the bearskin” was quickly shortened to “bear” to talk about a speculator selling stock or the stock itself being sold by a speculator.
Others say that it refers to the way a bear attacks, slashing downward with its claws. A bull on the other hand attacks by charging forward.
Sam Stovall, chief investment strategist at CFRA says that the term “bear” is a reference to the fact that bears retreat to their dens to hibernate, represents the market retreating from its gains.
How many bear markets have there been?
The last time all three indexes were in bear market territory was in March 2020 when covid-19 lockdowns slammed the breaks on the global economy. It was also the shortest bear market on record as the federal government injected trillions of dollars into the economy to stave off complete collapse.
Prior to that bear market, the US economy had enjoyed an unprecedented bull market fueled by massive injections of liquidity and interest rates near zero in response to the Great Recession. The bear market associated with the bursting of the housing bubble in 2007, lasted for 17 months.
Since 1928 there have been 25 bear markets according to Investopedia. The deepest and longest began in 1929 and lasted until 1932, it was followed by the Great Depression.