The S&P 500 Just Confirmed a Bear Market: What Investors Need to Know

The bear is back.

The S&P 500 on Monday confirmed what many investors have been saying for months: the large-cap benchmark is in the grips of a bear market.

Equities suffered sharp losses on Monday after major benchmarks had their worst week since January. Much of the weakness was attributed to Friday’s CPI, which rose to 8.6% year-on-year – a 40-year high. Investors fear the US Federal Reserve will have to hike rates even more aggressively than already expected, risking a recession in its efforts to tame inflation.

The S&P 500 SPX,
It fell 151.23 points, or 3.9%, to 3,749.63, down 21.8% from its record close on Jan. 3 and beating the 20% pullback threshold traditionally used to define a bear market.

You have to know: The S&P 500 is clinging to a key support level after Friday’s meltdown. Here’s what happens when this fails

The S&P 500 briefly traded below the bear market threshold in May but failed to close below it. Stocks subsequently rallied, but the recovery has since slowed as recession fears have increased.

The Dow Jones Industrial Average DJIA,
ended down 876.05 points, or 2.8%, to finish at 30,516.74 after losing more than 1,000 points from its session low. A close below 29,439.72 would put the blue chip indicator in a bear market. The tech-heavy Nasdaq Composite COMP,
The stock, which slid into a bear market earlier this year, fell 4.7% on Monday, nearly 33% below its record close on Nov. 19, 2021.

Of course, many investors and analysts see a 20% pullback as an overly formal, if not outdated, metric, arguing that stocks have been behaving like a bear for a long time.

Note that the close of the S&P 500 on Monday means the start of the bear market has backdated to the Jan. 3 high. A bear market is declared over once the S&P 500 has risen 20% from a low.

How have stocks behaved after a bear market was confirmed? History shows that there was usually more pain in store.

There have been 17 bear or near-bear markets since World War II, Ryan Detrick, LPL Financial’s chief markets strategist, said in a May note. In general, once a bear market begins, the S&P 500 has continued to fall. And he said bear markets lasted about a year on average and caused an average peak-to-trough decline of just under 30%. (see table below).

LPL Research

Beyond averages, there is a lot of variability in the length and depth of past bear markets. The steepest decline, a peak-to-trough drop of almost 57%, occurred in the 17 months that marked the 17-month bear market that accompanied the 2007-2009 financial crisis. The longest was a 48.2% decline that lasted almost 21 months in 1973-74. The shortest was the almost 34% drop that took place in just 23 trading sessions as the outbreak of the COVID-19 pandemic triggered a global defeat that bottomed on March 23, 2020 and marked the start of the current bull market. The S&P 500 Just Confirmed a Bear Market: What Investors Need to Know

Brian Lowry

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