A Bear Market Just Hit Wall Street. What Does that Mean?

Daniella Cressman

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A bear market has just hit Wall Street, and a lot of investors are terrified: Many are suffering great losses, but should they persevere or simply sell their stocks and bonds?

"A bear market is a term used by Wall Street when an index like the S&P 500, the Dow Jones Industrial Average, or even an individual stock, has fallen 20% or more from a recent high for a sustained period of time." —Stan Choe and Alex Veiga

While it might be tempting to think that a bear market is bad news, it's actually a lot more complicated than that: A lot of losses have occurred, and will likely continue for a while.

Stocks have declined almost 35% on average when a bear market coincides with a recession, compared with a nearly 24% drop when the economy avoids a recession, according to Ryan Detrick, chief market strategist at LPL Financial. —Stan Choe and Alex Veiga

It might be tempting to sell everything right now, but that would mean you wouldn't have access to the wins that often follow such losses.

While dumping stocks would stop the bleeding, it would also prevent any potential gains. Many of the best days for Wall Street have occurred either during a bear market or just after the end of one. That includes two separate days in the middle of the 2007-2009 bear market where the S&P 500 surged roughly 11%, as well as leaps of better than 9% during and shortly after the roughly monthlong 2020 bear market. —Stan Choe and Alex Veiga

In other words, winter (a metaphor for a bear market) is always going to be a time of scarcity, but you can either enjoy it, go skiing, and enjoy the conditions by being prepared for them, or you can hibernate and be in a mental state of terror.

On average, bear markets have taken 13 months to go from peak to trough and 27 months to get back to breakeven since World War II. The S&P 500 index has fallen an average of 33% during bear markets in that time. The biggest decline since 1945 occurred in the 2007-2009 bear market when the S&P 500 fell 57%. —Stan Choe and Alex Veiga

Bear markets can often lead to troubled times for investors who have not bothered to build up an emergency fund. This can result in a lot of hardship since the markets do tend to swing, and life can be tough for over a year.

That being said, the length of a bear market does vary depending on how fast an index fund enters into it.

History shows that the faster an index enters into a bear market, the shallower they tend to be. Historically, stocks have taken 251 days (8.3 months) to fall into a bear market. When the S&P 500 has fallen 20% at a faster clip, the index has averaged a loss of 28%. The longest bear market lasted 61 months and ended in March 1942 and cut the index by 60%. —Stan Choe and Alex Veiga

People can experience enormous rewards if they simply hold onto their investments and wait it out.

While dumping stocks would stop the bleeding, it would also prevent any potential gains. Many of the best days for Wall Street have occurred either during a bear market or just after the end of one. That includes two separate days in the middle of the 2007-2009 bear market where the S&P 500 surged roughly 11%, as well as leaps of better than 9% during and shortly after the roughly monthlong 2020 bear market. —Stan Choe and Alex Veiga

Perhaps it's best not to sell your stocks right now unless you absolutely need to because you could actually benefit from the bear market in the long run!

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Canadian-American author writing about local politics, personal finance, & dining in Albuquerque.

Albuquerque, NM
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