The S&P 500 just confirmed a bear market: What investors need to know

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The bear is back.

The S&P 500 on Monday confirmed what many investors have been saying for months: the big-cap benchmark is in the hands of a bear market.

Shares suffered heavy losses on Monday after major benchmarks saw their worst week since January. Much of the weakness was attributed to Friday’s reading of the May consumer price index, which rose to 8.6% year-on-year, a 40-year high. Investors fear the Federal Reserve will have to raise rates even more aggressively than previously expected, risking a recession in its effort to control inflation.

The S&P 500 SPX,
-3.88%
it fell about 151 points, or 3.9%, to close at 3,750 on Monday, according to preliminary data. This left it well below the 3,837.25 threshold, which marked a 20% decline from its January 3 record, meeting the traditional definition of a bear market, according to Dow Jones Market Data.

Please know: The S&P 500 clings to a key support level after Friday’s fall, that’s what happens if it fails

The S&P 500 traded briefly below the bearish market threshold in May, but did not close below. Shares rebounded subsequently, but the rebound has since subsided as fears of recession have risen.

The Dow Jones Industrial Average DJIA,
-2.79%
it ended with a loss of about 876 points, or 2.8%, close to 30,518, after falling more than 1,000 points to the minimum of its session. A close below 29,439.72 would put the top indicator in a bear market. The Nasdaq Composite COMP with high technology,
-4.68%,
which fell in a bear market earlier this year, fell 4.7%.

Of course, many investors and analysts see a 20% decline as a metric that is too formal if not obsolete, arguing that stocks have been behaving bearishly for a long time. And keep in mind that if the S&P 500 closed below the threshold, the start of the bear market would fall back to its January 3 peak. It is declared a bear market when the S&P 500 has risen 20% from the low.

How did the stock behave once a bear market was confirmed?

There have been 17 bearish or near-bearish markets since World War II, Ryan Detrick, chief market strategist at LPL Financial, said in a May note. Overall, the S&P 500 has fallen even further once a bear market begins. And, he said, bearish markets have lasted, on average, about a year, producing an average peak-down decline of just under 30%. (see table below).

LPL search

Beyond the averages, there is a lot of variability in the length and depth of previous bear markets. The sharpest fall, a sharp drop of at least 57%, occurred in the 17 months that marked the 17-month bearish market that accompanied the 2007-2009 financial crisis. The longest was a 48.2% drop that lasted almost 21 months in 1973-74. The shortest was the nearly 34% drop in just 23 trading sessions, as the onset of the COVID-19 pandemic caused a global crash that hit rock bottom on March 23, 2020. and marked the beginning of the current bullish market.



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