June 28, 2022

Bear Market Confirmed with Sharp Declines in US Stocks

The year has been brutal for the US stock market so far and on Monday, it achieved a rather grim milestone. The slide in the S&P 500 index confirmed that it was officially in bear market territory, making it a first since March 2020 when the coronavirus pandemic had first struck. This was brought about due to worries about soaring inflation, future economic growth and aggressive monetary policy tightening by the US Federal Reserve.

The Benchmark S&P 500 Falls

On Monday, there was a drop of 3.9% in the benchmark US S&P 500 index, which brought it to a low of 21.8% from its closing high recorded on 3rd January this year. The index is considered to be in bear market territory if it declines by more than 20% from its high. Considering past bear markets, it is highly likely that investors are in for some more pain.

Since 1946, the S&P 500 has seen 13 bear markets and has declined by 32.7% on average. This also includes a drop during the bear market of 2007 to 2009 of a whopping 57% when the financial crisis had struck. During bear markets, it takes almost a year for the index to hit bottom and then it takes almost two years for it to climb back up again.

Out of the total 13 bear markets that the S&P 500 has seen, the time taken to return to breakeven levels has not been fixed. The shortest time was three months, while the longest took 69 months. After hitting a low on March 2020, the index had surged by 114% in January. This was after policies had been imposed for helping the economy stabilize in the wake of the pandemic.

The Reversal Trend

The start of 2022 saw the gains made in the S&P 500 begin to show a reversal trend. This was because the US Federal Reserve became a lot more hawkish than expected and indicated that monetary policy would be tightened aggressively to combat the rising inflation. This year has already seen a hike of about 75 basis points in the interest rate so far and more hikes are expected ahead. The Fed is meeting this week and will announce another hike, which has put pressure on bonds and stocks.

Jerome Powell, the chairman of the Fed, said that they would raise the interest rates as high as required for bringing down inflation. However, he also believes that policymakers can help the economy make a soft landing. The Russian invasion of Ukraine has also added to the volatility in markets this year, which has resulted in a massive spike in commodity and fuel prices.

The S&P 500 had almost confirmed a bear market in the previous month but had rallied once more amidst hopes that the Fed could slow down the rate hike. Last week, Wall Street saw its biggest decline in a week, and the latest blow came because of the inflation numbers on Friday that turned out to be higher than expected.

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