Stocks fall on recession fears; Dow slips into bear market
By DAMIAN J. TROISE and ALEX VEIGA AP Business Writers
A broad slide on Wall Street extended the major indexes’ losing streak to a fifth day Monday, deepening a steep market slump amid growing fears of a global recession.
The Dow Jones Industrial Average fell 1.1%, becoming the last of the major U.S. stock indexes to fall into what’s known as a bear market. The S&P 500 closed 1% lower and the Nasdaq dropped 0.6%.
The British pound dropped to an all-time low against the dollar and investors continued to dump British government bonds in displeasure over a sweeping tax cut plan announced in London last week.
Markets in Europe closed mostly lower. The head of the European Central Bank warned that the economic outlook “is darkening” as high energy and food prices pushed up by the war in Ukraine sap consumer spending power. France, the EU’s second-biggest economy, forecast a substantial slowdown in economic growth next year.
In the U.S., stock indexes have been losing ground, coming off their fifth weekly loss in six weeks.
“Yields are higher, the dollar is stronger and stocks are weak,” said Willie Delwiche, investment strategist at All Star Charts. “That’s been the theme, really all year, and intensified a little bit last week and that’s playing out this week.”
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AP Photo/Seth Wenig
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.
Why use a bear to represent a market slump? Bears hibernate, so bears represent a market that's retreating, said Sam Stovall, chief investment strategist at CFRA. In contrast, Wall Street's nickname for a surging stock market is a bull market, because bulls charge, Stovall said.
The S&P 500, Wall Street's main barometer of health, slid 3.9% Monday. The index fell an additional 0.5% as of midday Tuesday and is 22.2% below its record set early this year and now in a bear market.
The Dow industrials sank 2.8% Monday and the tech-heavy Nasdaq composite, which already was in a bear market, tumbled 4.7%.
The most recent bear market for the S&P 500 ran from February 19, 2020 through March 23, 2020. The index fell 34% in that one-month period, the shortest bear market ever.
David L. Nemec/New York Stock Exchange via AP
Market enemy No. 1 is interest rates, which are rising quickly as a result of the high inflation battering the economy. Low rates act like steroids for stocks and other investments, and Wall Street is now going through withdrawal.
The Federal Reserve has made an aggressive pivot away from propping up financial markets and the economy with record-low rates and is focused on fighting inflation. The central bank has already raised its key short-term interest rate from its record low near zero, which had encouraged investors to move their money into riskier assets like stocks or cryptocurrencies to get better returns.
Last month, the Fed signaled additional rate increases of double the usual amount are likely in upcoming months. Consumer prices are at the highest level in four decades, and rose 8.6% in May compared with a year ago.
The moves by design will slow the economy by making it more expensive to borrow. The risk is the Fed could cause a recession if it raises rates too high or too quickly.
Russia's war in Ukraine has also put upward pressure on inflation by pushing up commodities prices. And worries about China's economy, the world's second largest, have added to the gloom.
AP Photo/Eduardo Munoz Alvarez
Even if the Fed can pull off the delicate task of tamping down inflation without triggering a downturn, higher interest rates still put downward pressure on stocks.
If customers are paying more to borrow money, they can't buy as much stuff, so less revenue flows to a company's bottom line. Stocks tend to track profits over time. Higher rates also make investors less willing to pay elevated prices for stocks, which are riskier than bonds, when bonds are suddenly paying more in interest thanks to the Fed.
Critics said the overall stock market came into the year looking pricey versus history. Big technology stocks and other winners of the pandemic were seen as the most expensive, and those stocks have been the most punished as rates have risen. But the pain is spreading widely, with retailers signaling a shift in consumer behavior.
The bond market is also having recession jitters. Overnight, the yield on the two-year Treasury briefly rose above the yield on the 10-year Treasury. That inversion of short- and long-term yields has been a reliable indicator of recession over the years, although the downturn could follow anywhere from a few weeks to a year or two later.
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.
AP Photo/Seth Wenig
If you need the money now or want to lock in the losses, yes. Otherwise, many advisers suggest riding through the ups and downs while remembering the swings are the price of admission for the stronger returns that stocks have provided over the long term.
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.
Advisers suggest putting money into stocks only if it won't be needed for several years. The S&P 500 has come back from every one of its prior bear markets to eventually rise to another all-time high.
The down decade for the stock market following the 2000 bursting of the dot-com bubble was a notoriously brutal stretch, but stocks have often been able to regain their highs within a few years.
AP Photo/Eduardo Munoz Alvarez
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%.
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. It cut the index by 60%.
AP Photo/Seth Wenig
Generally, investors look for a 20% gain from a low point as well as sustained gains over at least a six-month period. It took less than three weeks for stocks to rise 20% from their low in March 2020.