NEWS ALERT June 13, 2022, 4:35 pm ET:
The S&P 500 ended the day in bear market territory after a broad equity selloff triggered by May's unexpectedly high inflation reading from the Bureau of Labor Statistics.
A bear market is when markets are declining, and market sentiment is pessimistic. Generally, a bear market occurs when a broad market index falls by 20% or more over at least a two-month period.
Present stock prices generally reflect expectations of future cash flows and profits from
companies. As expectations for growth decline, prices of stocks can follow. That can produce herd behavior and fear that brings a rush to protect losses, prolonging the bear market. Bear markets happen for a variety of reasons, but a weak economy, bursting market bubbles, pandemics, wars, and global crises can all cause a bear market.
Changes in the tax rate or the federal funds rate can also lead to a bear market. In the same way, a drop in investor confidence can signal the onset of a bear market. When investors believe something is about to happen, they will take action — in this case, selling off shares to avoid losses. Inflation and interest rate hikes are a large part of the present market headwinds.
“Persistent inflation, another Fed policy mistake and recession fears have unnerved investors,” with the S&P 500 briefly falling into bear market territory, says Edward Moya, senior market analyst for Oanda.
Bear markets are normal. Since 1928, there have been 26 bear markets in the S&P 500 Index. There have also been 27 bull markets — and stocks have risen significantly over the long term. Over the longest-possible term, bull markets have gone higher and lasted longer than bear markets.
Bear markets can be cyclical or longer-term. The former can last for several weeks or a couple of months and the latter can last years. On average, bear markets tend to be short-lived. The average length of a bear market is less than 10 months. In comparison, the average bull market is over 3.8 years.
A bear market is different than a correction, which is a downward trend that lasts two months or less. Corrections can be a good opportunity for value investors to enter thestock markets, but entering during bear markets present more of a challenge. That’s because it is almost impossible to know when the bear market has bottomed.
Poor market sentiment and falling stock values can be unnerving. Many people are tempted to cash out before they “lose any more money.” But pulling out guarantees a loss. It would be so helpful to know the end of the bear market or the beginning of the next bull run. But it is anyone’s guess. It’s almost impossible to gauge the best time to get out or get back in.
The other option is to stick with good companies and stay in and let your investments and recover. The market will go up again – just don’t miss out. Ned Davis Research found that in the last 20 years half of the S&P 500 Index’s strongest days occurred during a bear market and another 34% of the market’s best days took place in the first two months of a bull market (before it was clear a bull market had even begun). Sometimes the best way to weather a downturn can be to stay invested since it’s difficult to time the market’s recovery.
According to Ramsey Solutions: “Don’t try to time the market. Focus on time in the market."