Protect your pocketbook from a bear market. But first, what is it?
This week the S&P 500 fell 21% from its most recent market high, which was on Jan. 3, hitting the bear market milestone.
S&P 500 tracks the performance of 500 large companies listed on stock exchanges in the United States.
Here’s what to know about the bear market and how to prepare for a recession.
What is a bear market?
Salil Sarkar, University of Texas at Arlington finance professor, said the term “bear market” is used as a milestone economists use when a flagging market falls. A bear market is when the market drops 20% or more compared to its recent high, he said.
Another milestone that comes before a bear market is known as a correction, which happens when the market falls 10% from its recent high.
“It’s not that all corrections lead to [a] bear market,” Sarkar said. “For example, in the last 50 years, we have had maybe 24 corrections but only five of them have led to bear market.”
What causes a bear market?
Anytime there is an interest rate hike, it will cause a valuation reduction, Sarkar said.
On Wednesday, the Federal Reserve raised interest rates .75%, the highest since 1994, to mitigate inflation. Fed officials also projected the economy will grow 1.7% this year, down from their previous March prediction of 2.8%.
“The expectation of an interest rate increase has led the market to fall drastically,” Sarkar said. “And then of course we have had so many other things in conjunction.”
Some of those factors include supply chain shortages, contributing to higher grocery prices, and Russia’s war in Ukraine, which contributes in part to higher gas prices.
Are bear markets an indicator that we’ll see a recession this year?
Sarkar said the technical definition of a recession is two consecutive quarters of negative GDP.
The U.S. has already seen its first fiscal quarter of negative GDP this year with the results for the second quarter expected at the end of June.
“If [the second quarter] comes out to be negative, yes we are in recession,” Sarkar said. “Recession is always in the rearview mirror. Why? Because it’s always two consecutive quarters of negative GDP.”
How will a recession be comparable to 2008?
The last memorable recession was in 2008, but it is not the latest—2020 saw a brief recession when the country entered a standstill at the beginning of the COVID-19 pandemic.
Recessions come in different durations. The 2008 recession lasted about 18 months whereas the 2020 recession started in March and recovered by August.
There are two silver linings in the case of an imminent recession, Sarkar said. One is the amount of job openings due to mass resignations during the pandemic.
Another silver lining that could happen is if Russia stopped its war in Ukraine, putting an end to economic embargoes on Russian oil and renewing optimism.
“Everything is dependent on human psychology,” he said. “If people feel excited, there won’t be a recession.”
What will be most impacted by a recession?
Generally recessions are accompanied by layoffs, Sarkar said, although this year is different considering the labor shortage.
Outside of the workforce, most pocketbook issues like gas prices and groceries are impacted during recessions.
Sarkar said for families navigating price increases, keeping a budget is key. Cutting down on the amount of days they eat out and saving as much as they can for their emergency funds are other ways to feel less impacted if a recession were to happen.
