Explained: What is causing Wall Street to be close to a bear market?

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The stock market has been experiencing a skid this year, and the S&P 500 has approached what is considered a bear market. Investors have been reconsidering the prices they’re willing to pay for a wide range of stocks, from high-flying tech companies to traditional automakers, due to high-interest rates, high inflation, and the war in Ukraine.

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Those investors who began trading on their smartphones during the pandemic got their start just two years ago, but this would be a first for those that got their start just two years ago. Stocks often tended to go in only one direction for years, thanks in large part to extraordinary actions taken by the Federal Reserve. Rather than rally behind “buy the dip” after every market downturn, fear is enveloping the rallying cry that the dip is about to turn into a crater.

Below are a few common questions regarding bear markets:

BEAR MARKETS: Why Are They Called That?

The term bear market describes an investment market that has experienced a sustained drop of 20 percent or more from a recent high for an index like the S&P 500, Dow Jones Industrial Average, or individual stock.

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To illustrate a market slump, why use a bear? Sam Stovall, CFRA’s chief investment strategist, said bears hibernate, which indicates the market is retreating. Wall Street’s term for a surging market is a bull market, because bulls charge, Stovall said.

A drop of 165.17 points Wednesday pushed the S&P 500 index down to 3,923.68. It’s down 18.2 percent from its January 3 high of 4,796.56. Nasdaq has already fallen 29 percent from its peak of 16,057.44 in November. The Dow Jones Industrial Average has fallen 14.4 percent from its recent peak.

Historically, the S&P 500 has been in a bear market between February 19, 2020 and March 23, 2020. This one-month period saw a 34 percent drop in the index. It was the shortest bear market in history.

Why do investors seem to be so worried?

Inflation, which is destroying the economy, is the number one enemy of the market. Interest rates are rising rapidly as a result. Stocks and other investments are suffering from low interest rates, and Wall Street is experiencing withdrawal symptoms.

In a pivot away from propping up financial markets and the economy with record-low interest rates, the Federal Reserve is now focusing on fighting inflation. A recent increase in the central bank’s key short-term rate has been announced, which has encouraged investors to invest their money in riskier assets like stocks and cryptocurrencies to get higher returns.

WHEN DOES A BEAR MARKET END?

The average investor seeks a 20 percent return from a low point and a six-month gain. From March 2020’s low, stocks rose 20 percent in fewer than three weeks.

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