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Get Ready to Enter Bear Market Territory

  • The S&P 500 is poised to become an official bear market
  • Stock market selloffs are being driven by inflation, interest rate hikes, and global uncertainty
  • The market bottom may not be hit until October, investors seek safe havens

Beginnings of the Bear Market

This summer is quickly beginning to look like bear season. The bull market is almost officially over. Stocks have fallen dramatically in 2022. The Nasdaq, down nearly 25%, is in a bear market. The S&P 500 is on a six-week losing streak and about 16% below its all-time high. Some analysts forecast a stock market downturn where losses exceed those of the 2008 stock market crash.1

A bear market is, by definition, a 20 percent decline from the most recent market top. Technically, the Standard & Poor’s 500 stock index is in a “correction”. A correction is a decline between 10 percent and 20 percent.2

The S&P 500 entered correction territory last month. That is the second time this year. A tough April for stocks was followed by an even rougher May. Stocks plummeted as investors dumped megacap tech stocks. Netflix shares, for example, have plunged 75 percent. Online payment company PayPal is down 74 percent from its high.3

Investors bailed on formerly highflying favorites in reaction to unchecked inflation. As well as the Fed’s mad scramble to stop it with aggressive rate hikes.

Hopes that the April data would show inflation had peaked were dashed. The annual pace of inflation slowed to 8.3% from 8.5% in March. Moreover, a core CPI reading, which strips out food and energy, showed an unexpected monthly rise.

Based on figures going back to 1929, the average bear market sees a median fall of 33.2%. On average, it has taken 80 trading days for the S&P 500 to hit its low after entering a bear market.4

So stocks may need to drop a lot further before the market finally hits bottom. Especially since the Federal Reserve seems intent on raising interest rates more aggressively to fight inflation — no matter what happens to stocks.

“Restoring price stability is an unconditional need. It is something we have to do,” Fed Chair Powell said. “There could be some pain involved,” Powell added. “The Fed will continue to raise rates until they see a clear breaking of the inflation trend.” The sinking market is revealing the true value of stocks after the Fed’s price supports have been pulled out from underneath it.5

The big question is how much lower the US S&P 500 might fall. The good news, according to Bank of America strategist Michael Hartnett, is that “bear markets are quicker than bull markets”. Based on data gleaned from the last 19 of them, he reckons the S&P 500 “still has another roughly 25% downturn ahead of it from current levels”. The bottom, he suggests, might be hit in October. Though “a floor does not equal a new bull market for tech stocks.” They are likely to “remain in a bear market for the next two years”.6

Beginnings of the Bear Market

How to Treat a Bear

Some advisors suggest that if you’re retired, don’t take withdrawals from your stock funds in a bear market unless you have no other choice. You won’t have income to cover your losses. And if your stock fund is down 15 percent and you withdraw 4 percent, your account will be down 19 percent. Withdrawals in a bear market just make things worse.

Instead, many financial planners recommend putting some funds in ultrasafe investments, such as gold. Gold acts as a hedge against the depreciation of stocks in your portfolio. To learn more about how a Gold IRA can protect the value of your funds, contact American Hartford Gold today.

Notes:
1. https://www.cnn.com/2022/05/16/investing/stocks-bear-market-federal-reserve-inflation/index.html
2. https://www.aarp.org/money/investing/info-2022/bear-market-field-guide.html
3. https://www.aarp.org/money/investing/info-2022/bear-market-field-guide.html
4. https://www.marketwatch.com/story/the-s-p-500-is-on-the-brink-of-a-bear-market-heres-the-threshold-11652381057
5. https://www.wsj.com/amp/articles/feds-powell-to-take-wsj-questions-on-inflation-and-economic-outlook-11652779802
6. https://www.theweek.co.uk/business/markets/956728/bear-market-how-long-will-the-carnage-last
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