In recent times, Wall Street faces the looming potential of entering another bear market, exacerbated by the Trump administration’s aggressive tariff strategies. These tariffs, aimed at imported goods globally, have raised concerns about their potential to destabilize the global economy.
Reflecting on bear markets, the last notable decline occurred in 2022, though the current economic situation draws more parallels with the swift downturn of 2020 when the S&P 500 index plunged by 34% within just a month—the shortest bear market in history.
**Why is it termed a bear market?**
On Wall Street, a bear market is identified when indices such as the S&P 500 or the Dow Jones Industrial Average fall 20% or more from recent peaks over a sustained period. The metaphor of a bear is used because bears hibernate, symbolizing a retreating market. Conversely, a bull market, where the market is rising, evokes imagery of charging bulls.
Recently, the S&P 500, a key gauge of Wall Street’s health, marked a 0.2% decrease on Monday, having dipped as low as 4.7% earlier in the day. It is currently 17.6% below the record high achieved on February 19. Meanwhile, the Dow industrials experienced a 0.9% drop, though the tech-focused Nasdaq composite, already in a bear market, recovered slightly with a 0.1% gain.
**Understanding Investor Anxiety**
The intensifying trade war has amplified apprehensions on Wall Street concerning how businesses and consumers might react. President Donald Trump recently intensified trade tensions by imposing a 10% baseline tax on imports from every nation and higher tariffs on certain countries with trade surpluses with the U.S. This move resulted in a dramatic plummet in global markets, exacerbated when China announced retaliatory tariffs.
These tariffs impact economies by imposing taxes on importers, often passed down to consumers, thus increasing inflationary pressures. They also encourage retaliatory measures from trade partners, consequently damaging all parties involved. Moreover, tariffs complicate business decisions regarding supplier selection, factory locations, and pricing strategies, creating uncertainty that may lead to delays or cancellations in investments that are crucial for economic growth.
**Duration and Impact of Bear Markets**
Historically, bear markets have taken approximately 13 months to reach their lowest point and 27 months to recover since World War II. The S&P 500 has historically declined by an average of 33% during such periods. The most severe drop since 1945 took place between 2007 and 2009, with the S&P 500 declining by 57%.
Data suggests that faster declines into bear markets often result in less severe losses. Typically, stocks take about 8.3 months to enter a bear market. In cases where the S&P 500 falls 20% more quickly, it has tended to suffer an average loss of 28%. The longest bear market lasted 61 months, concluding in March 1942, with a 60% reduction in the index.
**Ending a Bear Market**
Generally, a bear market is considered over if there’s a 20% increase from its nadir, along with sustained gains over at least six months. The March 2020 bear market recovered remarkably within less than three weeks.
**Should Investors Exit the Market Now?**
For those who need liquidity immediately or wish to secure their current positions, selling might be advisable. However, many financial advisors recommend weathering the market’s fluctuations in anticipation of stronger, long-term returns from stocks. Opting to sell might stem losses but could also forfeit potential recoveries. Historically, some of Wall Street’s best days have occurred during or shortly after bear markets, highlighting the volatility and eventual resurgence of stocks.
Advisors typically suggest investing in stocks only if the funds won’t be needed in the short term. The S&P 500 has consistently bounced back from previous bear markets, eventually achieving new all-time highs. Despite the difficult years following the dot-com bust of 2000, stocks have frequently rebounded to surpass previous highs within several years.