What is a bear market?
The stock market tumbled on Monday, continuing a steep decline after the federal government reported that inflation spiked to a 40-year high last month.
The S&P 500, the benchmark index measuring the health of the stock market, dipped into its lowest territory since March 2021, officially entering a bear market.
Here’s what a bear market is and how it bodes for the economy going forward.
What is a bear market?
The stock market hits bear market territory when major indexes — such as the S&P 500 and the Dow Jones — fall 20 percent from an all-time high.
An index is essentially a bundle of stocks representing a broad cross section of the economy. The S&P has 500 companies in its bundle and is seen as the best indicator for the overall U.S. market.
Bear markets are typically caused by investors selling off stocks due to economic uncertainty resulting from geopolitical crises, pandemics, inflation, bursting asset bubbles or other crises.
The sell-off eventually causes prices to drop low enough for investors to dip back into trading and eventually pull the market out of bear territory.
The opposite of a bear market is a bull market, in which major indexes and the overall market experience a prolonged upward swing.
How long might it last?
Bear markets can last for several years or just a few weeks. In contrast to a correction, which signifies a short-term loss in major indexes of 10 percent or more, bear markets take longer to dig out of.
The last bear market was recorded in 2020, following a historic 11-year bull market run that ended when the pandemic shut down huge swaths of the economy.
The bear market ran from late February to late March, the shortest in history.
As measured by the S&P 500, the last long-term bear market stretched from 2007 to 2009 during the Great Recession.
What does it mean for the economy?
Along with the S&P, the other two major indexes are in bad shape.
The tech-heavy Nasdaq composite index has remained in bear market territory for more than two months and recently fell 34 percent from its all-time high, while the Dow Jones also fell 15 percent from its high on Monday, nearing a bear market.
With inflation woes and a tumbling stock market, a majority of economists are predicting a recession next year, according to a recent Financial Times survey.
The falling indexes show the market is likely headed for a longer bear market run than the one in 2020. But multiple factors could influence where stocks go from here, including how much longer Russia’s war in Ukraine lasts and how long it takes inflation to stabilize.