NEW YORK (AP) — Despite initial apprehensions and a prolonged duration, last year’s bear market on Wall Street proved to be relatively mild compared to previous occurrences.
Following the closing of the S&P 500 on Thursday, which stood more than 20% above its mid-October level, Wall Street can now officially determine the precise duration of its most recent bear market. Traders use the term “bear market” to describe a sustained decline of at least 20% for the S&P 500. In this case, it commenced on January 3, 2022, when the S&P 500 reached a record high, and concluded on October 12, when it hit its lowest point, marking a 25.4% decline.
Concerns regarding record-high inflation were the driving force behind the market decline, representing one of the most significant inflationary periods in recent history. Specifically, investors were apprehensive about the actions the Federal Reserve would take to counteract soaring inflation rates. In response, the Fed aggressively increased interest rates, reaching their highest level since 2007 after being close to zero for approximately a year. The objective of these elevated interest rates was to mitigate inflation by deliberately decelerating economic growth and consequently reducing prices across various asset classes, including stocks, bonds, and other investments.
In comparison to historical bear markets since 1950, the recent nine-month bear market with a 25.4% decline appears relatively mild. On average, bear markets during this period lasted for approximately 13 months and experienced a larger decline of 34.2%. However, when considering longer downturns like the Great Depression and other extended periods of market decline, the typical bear market appears even more severe, as per data from S&P Dow Jones Indices.
One contributing factor to the milder nature of the recent bear market could be the resilience of the economy, which has thus far managed to avoid a recession. Despite the significant interest rate hikes, the job market has remained remarkably robust. This stability has provided households with the confidence to continue spending, thereby preventing a sharp decline in the overall economy. However, certain industries such as manufacturing and banking have already shown signs of strain due to the burden of high interest rates.
The recent bear market, lasting nine months with a 25.4% decline, is considered milder when compared to the average bear market since 1950. Typically, bear markets during this period lasted around 13 months and witnessed a larger decline of 34.2%, as per data from S&P Dow Jones Indices. However, if we extend our analysis to include longer downturns such as the Great Depression and other prolonged economic slumps, the typical bear market appears even more severe.
One possible reason for the relative mildness of the recent bear market is the economy’s ability to avoid a recession thus far. Despite the series of interest rate hikes, the job market has remained resilient and stable. This has had a positive impact on household spending, preventing a significant downturn in the overall economy. However, certain industries, including manufacturing and banking, have already shown signs of strain due to the weight of high interest rates.
The Federal Reserve’s interest rate hikes may not be over yet. Although there is an anticipation of a pause in rates at the upcoming meeting, which would break a streak of continuous rate increases lasting over a year, inflation remains uncomfortably high. As a result, the expectation is that the Fed will resume hiking rates in July.
Critics anticipate that stocks may face challenges in their upward trajectory, particularly due to the fact that only a small group of tech-related stocks have been driving most of the market’s gains this year. Concerns about persistently high inflation, declining profits, and elevated interest rates are weighing on the broader market.
However, bull markets are typically prolonged periods. According to S&P Dow Jones Indices, the average bull market since 1932 has lasted nearly five years and generated a substantial gain of 177.8%.
