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The S&P 500 index fell into the so-called bear market on Friday. But what does that mean?
“Bear market” is a term used by investors to describe a sharp and sustained decline in the market. Technically, it’s a drop of 20% or more from recent highs.
Investors typically apply the phrase to a broad stock index like the S&P 500 or Dow Jones Industrial Average, but it works for individual stocks as well.
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The tech-heavy Nasdaq Composite stock index is already in a bear market. Wall Street is currently spooked by many factors, including high inflation, rising interest rates, the war in Ukraine, and recession fears.
There is nothing particularly special about the 20% demarcation line used to define a bear market. It is more of a symbol and a psychological hurdle for investors.
“It’s a shortcut in the language that people use about financial markets,” Charlie Fitzgerald III, an Orlando, Florida-based certified financial planner, said of bear markets. “The bottom line is that it’s a tough time.”
By comparison, a “bull market” is a period when stocks are rising, which has largely been the case since the Great Recession.
Bear markets are a regular feature of the stock market. Since World War II, there have been nine falls from 20% to 40% in the S&P 500, and another three above 40%, according to Guggenheim Investments. (Analysis does not include 2022).
On average, stocks took 14 months and 58 months to recover, respectively, after those drops. The last bear market was in February and March 2020, when the S&P 500 fell 34%. However, shares recovered in mid-August.
It’s impossible to say how long the current recession will last, Fitzgerald said. “Human emotions are a difficult thing to predict,” she said.