What's happening
The S&P 500 has dropped more than 20% from its peak at the start of 2022, resulting in the first bear market since 2020.
Why it matters
A steep decline in a broad stock index suggests a sustained market downturn, seen by many investors as a sign of a possible looming recession.
The stock market took a big hit in June when the S&P 500, an index of 500 leading US publicly traded companies, fell to its lowest level since March 2021.
On June 13, the S&P 500 closed at 3,749.91 points, from a high of 4,818.62 on Jan. 4, representing a drop of 22%. Major players like Amazon, Apple and Meta all took hits to their market value.
As of June 23, the index sat at 3,795.73, still 21.2% below January.
The decline put stocks in bear market territory -- a sustained period of downward price trends -- for the first time since the start of the COVID-19 pandemic. (In contrast, a bull market is when stock prices remain on an upward trajectory.)
We've had many bear markets in the past, but the current situation is attracting extra attention because of soaring inflation and other factors that have some experts worried about a recession.
Here's what you need to know about bear markets, including why they happen, how long this one could last and what it means for the economy.
What is a bear market?
When a broad stock market index experiences a 20% or more decline from recent highs for at least two months it's considered a bear market.
Since 1928, the S&P 500 has had 26 bear markets, according to Hartford Funds.
The inverse of a bear market is a bull market, when there is a rise of 20% or more in a broad market index like the S&P 500 or Dow Jones Industrial Average over at least a two-month period.
There have also been 27 bull markets since 1928, according to Hartford Funds, averaging 991 days or 2.7 years.
How long does a bear market usually last?
It depends on which formula you use. According to investment analysis firmSeeking Alpha, the average duration of an S&P 500 bear market since the 1920s has been 289 days, or about nine and half months. (The shortest, in March 2020, during the onset of the COVID-19 pandemic in the US, lasted just one month.) On average, the S&P 500 declined about 36% during those bear periods.
But more recently, the 14 bear markets since World War II have averaged 359 days, or close to a year, according to Bespoke Investment Group.
Analyzing all the bear markets since World War II, Ben Carlson of Ritholtz Wealth Management found it took 12 months to go from "peak to trough," or from the end of a period of growth to hitting rock bottom.
That means the current bear market would bottom out at the beginning of 2023, a year after January's peak.
More on investing
- Smart Money Moves for a Bear Market: What Investors Should Do Now
- Inflation Got You Down? I Bonds Can Help Protect Your Savings
- As Crypto Prices Seesaw, Every New Investor Should Ask These 5 Questions
Does a bear market mean a recession is on the way?
A bear market can often, but not always, go hand in hand with arecession. In the 12 recessions since World War II, nine were accompanied by bear markets, Reuters reported.
But there have been 26 bear markets since 1928, and only 15 recessions.
Bear markets tied to a recession are usually longer (495 days compared to 198 days) and more severe (a 35% drop in the S&P 500 versus 28.2%), according to Bespoke Investment Group.
What causes a bear market?
Numerous factors can fuel a bear market. Ones relevant to our current situation include a weakened economy, and the ongoing invasion of Ukraine and its impact on the geopolitical landscape.
Chunks of the economy shutting down during the pandemic could also be a factor, as could the Federal Reserve's decision to raise interest rates to curb inflation. After hiking them a quarter of a percentage point in March and a half point in May, the Fedraised interest rates by three-quarters of a point in June.
Where does the phrase 'bear market' come from?
The terms "bear market" and "bull market" date to the early 1700s in London's Exchange Alley, a precursor to the modern-day London Stock Exchange, but there are several theories about their origins.
Traders who engaged in naked shorting -- or selling shares that haven't been affirmatively proven to exist -- were called "bear-skin jobbers," and later just "bears." The suggestion was they would sell a bear's hide before they even caught the animal.
Another explanation holds that the terms are related to how each animal attacks. A bear will swipe its claws downward, a metaphor for a downturn in the market. A bull will thrust its horns upward, suggesting an upward trend in the market.
And yet another theory is that a bear hibernates, similar to how a slumping market has gone to "sleep," Sam Stovall, chief investment strategist at investment research firm CFRA, told the Associated Press. A surging stock market is a bull market, according to Stovall, because bulls charge at their victims.
The terms first saw print in the 1761 book Every Man His Own Broker, written by economist Thomas Mortimer.
