The base index S&P 500 is falling, flirting with what investors call the territory of the bear market. If you’re just setting up or watching your retirement savings decline, here’s what you need to know about the Grizzly bear decline.

Stocks enter the market when the bear is widely followed by indices such as the S&P 500 or Dow Jones Industrial Average sinking 20% ​​of their highs. There is nothing official about the definition. Designation is a generalizing way for Wall Street to mark when markets have taken to make sense. It also gives investors a moment to think about how current market action can compare to previous downturns.

The S&P 500 on May 19 was approaching levels that would place it in the bear market for the first time in more than two years. Basically, this means that stocks have fallen quite a bit, and this decline has gained momentum. Most analysts base their calculations on the level of index closing, rather than on intraday levels.

This is the opposite of the bull market, when an index or security has risen 20% from a recent low.

The Nasdaq Composite, which is driven by technology stocks, has been on the bear market since March. The Dow Jones Industrial Average, which is more weighted on industrial and banking stocks, has not fallen as hard as the S&P 500, and therefore remains further away from bearish territory.

How long do bear markets last?

The most recent bear market was in early 2020, when the government blocked economic activities to slow the Covid-19 outbreak. The Dow returned to the bull market in March after 11 bear market trading days. It took the S&P 500 only 126 trading days to move from a record to a bearish market and return to a new high.

Even with the most recent market turbulence this year, the S&P 500 is still about 75% of its 2020 low, as of May 18th.

Bear markets are seldom so short. The foundations of a new bull market cannot be laid until people are convinced that stocks cannot rise, that the market is finally starting to revive. According to Yardeni Research Inc., the bear market from 2007 to 2009 covered 517 days (including non-trading days).

Stock markets can also sometimes flirt with bear market levels without actually reaching them. In both 2011 and 2018, the S&P 500 fell 19% to a minimum of deep sales. While some sectors as well as some other indices did fall more than 20%, the S&P index technically did not fall into bear market territory.

What is the difference between a bear market and a recession?

Often the bear market precedes a recession. But the bear market simply describes the reduction in the cost of shares or other securities, while the recession – a general decline in the production of goods and services in the country, which is usually measured as two consecutive quarters of lower growth, which is defined by the National Bureau of Economic. Research.

There were several bear markets that did not coincide with the recessions. From the time of the Great Depression to the end of 2020, there were 17 bear markets, nine of which were accompanied by a recession, according to investment company Invesco. This reinforces the late Nobel laureate economist Paul Samuelson, who once wrote that Wall Street indices predicted nine of the last five recessions.

Why are stocks falling?

The stocks suffered from a mix of factors. First of all, it is inflation and fears that the Fed’s actions to curb it could turn the economy into a sharp slowdown, which will hit the profits of corporations and, consequently, the value of companies in the stock market.

High consumer demand and supply chain disruptions, exacerbated by the recent Covid-19 lockdowns in some Chinese cities, have led to rising prices. The lack of chips has led to rising electronics costs. Russia’s war against Ukraine has led to rising energy prices.

Rising prices undermine the solvency of consumers and also affect the profitability of companies. Stock markets went down again on May 18 after earnings from Target Corp..

and Walmart Inc..

showed that rising costs reduce profits.

To curb inflation, the Federal Reserve has begun raising interest rates, which should weaken demand. Higher interest rates increase rewards for short-term cash savings, and so investing in things that promise rewards in the long run, such as in technology stocks, is less attractive. If the Fed raises rates too much, investors are also worried that they could slow growth to the point of recession.

What is a correction?

While the S&P 500 and Dow Jones Industrial Average have not yet reached bear markets, they have beaten the correction.

The correction drop is at least 10% in price from the very last peak. While it wipes value from a stock, bond, currency or commodity, many investors view the amendments as a signal to buy at a lower price.

Recently, markets are looking more volatile: stocks, bonds and cryptos are falling as investors struggle to cope with the large fluctuations that are troubling financial markets around the world. Caitlin McCabe of the WSJ examines some of the reasons for the recent market frenzy. Photo: Spencer Platt / Getty Images

Should I worry about my 401 (k) and retirement savings?

For those approaching retirement, such a decline could be a problem. But over the long history of the stock market bear markets have eventually gone away. Solid returns bring investment when markets are close to their lows. After the 2008 financial crisis, the stock entered the bull market for 11 years.

Where did the term “bear market” come from?

In the early bear market of 2020, Wall Street Journal columnist Jason Zweig reported on the history of bulls and bears in the world of finance.

He referred to Anatoly Lieberman, a linguist at the University of Minnesota, who said that the use of “bull” and “bear” to denote financial optimists and pessimists, respectively, originated in Britain in the early 18th century.

“Bull” caused a cry of a willing buyer. “Bear” apparently comes from the early adage “sell a bear’s skin before the bear is caught” – an apt metaphor for a short sale in which a trader sells borrowed shares in hopes of buying them back at a price. lower price.

The terms “bull market” and “bear market,” however, did not originate until the 1850s, says Barbie Popik’s lexicography. Even then, they often call the action just one day. The 20% threshold for bull and bear markets began to take hold only in the late 1950s and early 1960s. The use of terms hardens subsequent strong returns in the 1980s and 1990s.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com

Keeping cash today is incredibly popular on Wall Street. This is a major change from the way professional asset managers have behaved over the past decade. Dion Rabuen of the WSJ explains why cash is no longer rubbish. Illustration: Adele Morgan

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