The S&P 500 is officially in a bear market, joining the Nasdaq. Despite losing nearly 900 points on Monday, the Dow Jones is not quite in the clutches of a bear market yet. Monday’s selloff was triggered by fears that the Federal Reserve may raise interest rates more aggressively than signaled at its June 14-15 meeting.
Policymakers had expressed the likelihood of a 50 basis point hike at meetings in June and July. But an article in the Wall Street Journal evoked the prospect of central bank raises rates by three quarters by one percent after May’s consumer price index report showed U.S. inflation significantly higher than economists had expected. It would be the first time since 1994 that the Fed would raise rates so much in one fell swoop.
What is a bear market?
Two terms commonly used by Wall Street are bull and bear markets to refer to indexes like the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite rising or falling respectively. A bear market occurs when a market has fallen 20% or more from a recent high for an extended period of time.
According to Merriam Webster dictionary, the term bear market came first, based on a proverb that warns against selling “the bear skin before you have caught the bear”. The original phrase “sell or buy bear skin” was soon shortened to “bear” to refer to a speculator selling stock or the stock itself being sold by a speculator.
Others say it refers to how a bear attacks, cutting down with its claws. A bull, on the other hand, attacks by charging forward.
Sam Stovall, chief investment strategist at CFRA, says the term “bearish” is a reference to bears retreating to their dens to hibernate, represents the market retreating from its gains.
How many bear markets have there been?
The last time the three indices were in bearish territory was in March 2020 when covid-19 shutdowns broke pauses on the global economy. It was also the shortest bear market on record, with the federal government pumping trillions of dollars into the economy to stave off a complete meltdown.
Before this bear market, the US economy had experienced an unprecedented bull market fueled by massive liquidity injections and near-zero interest rates in response to the Great Recession. The bear market associated with the bursting of the housing bubble in 2007 lasted 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.