Market highs and lows are as normal as getting sick. You may not like it, but it happens.
After a 2-year-long rally amidst the pandemic, the US markets entered the bear market territory in June after a 20% fall from its peak at the start of the year. From this, many investors worldwide speculate whether we are at the precipice of a market drought or merely a hiccup towards recovery.
So, where are we right now? As the last quarter of 2022 begins, will the markets recover, or should we tighten our belts and brace for more pitfalls?
Is 2022 a bear market year?
The short answer is — yes, 2022 is a bear market year.
The S&P 500 closed at its lowest level in 2022 on September 26, while the Dow Jones Industrial Average officially entered a bear market.
Meanwhile, the tech-heavy Nasdaq has been dropping 5% consecutively in the last few weeks, erasing billions of dollars in value.
What causes a Bear Market?
Over the last decades, bear markets have started either because securities are overvalued or at the onset of a crisis.
Overvalued markets happen when investors pay for highly-touted stocks even when the companies are underperforming. This irrational market behavior, however, does not last forever. In the long run, the stocks will go down to reflect their true value.
Meanwhile, a crisis may also trigger a bear market. Take for example the COVID-19 crisis. Many businesses were forced to shut down because of lockdowns. Unemployment and inflation rose dramatically. The uncertainty driven by the virus caused investor panic, and the stock markets crashed.
Historically, though, the markets always recover. The question now is: When?
What caused 2022’s bear market?
The bear market of 2022 is the result of overvalued stocks and crises happening simultaneously.
Stock values soared at the beginning of 2022 despite companies underperforming. Global crises followed. The Russia-Ukraine war led to rising energy and food prices. China, being a global manufacturing powerhouse, caused supply chain bottlenecks when it decided to lock down huge parts of its economy as a response to rising COVID rates.
All of these led to a surge in inflation and forced the Fed to raise interest rates to offset it. Higher interest rates mean that companies find it harder to borrow and expand. Their stock prices decreased simultaneously, triggering a bear market.
However, markets are future-oriented. Though markets are down right now, investors are focused on recalibrating their strategies and finding quality assets on sale.
Bear Market vs. Recession: what’s the difference?
Bear markets happen when assets drop 20% or more over a few months. A recession happens when the economy slows down (mainly measured by declining GDP or Gross Domestic Product) over two consecutive quarters.
Recessions depend on economic performance, while bear markets depend on market performance. However, economic and market performances do not always dance to the same tune. There are times when the markets drop but the economic conditions are not low enough to trigger a recession. In this case, we would be in a bear market but not in a recession.
Although, it is important to note that when recessions occur, bear markets always happen (even if the vice versa is not true).
Case in point, there have been 12 bear markets in the U.S. since 1948, yet only 9 of them were accompanied by a recession.
How long does a Bear Market Last?
An average bear market lasts for 289 days (9 months). They could be extended by raising interest rates, tightening conditions, and further underperformance of low P/E ratio stocks.
This could feel like a long journey towards recovery, but there’s a light at the end of the tunnel.
While stocks lose value in a bear market, they gain this back and more when we shift to a bull market. Instead of aiming for quick returns, you ought to keep your eyes glued on the long-term and not be swayed by short-term fears.
Your time is better used evaluating your portfolios and being on the lookout for great investment opportunities.
Possible recovery scenarios
There are key events that might help shape how the future will look in the next months:
- First, most agree that the end of the COVID pandemic would boost the global markets. Only the World Health Organization (WHO) can officially declare this. While the WHO chief has implied that the pandemic’s end nears, simply putting the pandemic behind us does not automatically fix halted supply chains, resurrect bankrupt businesses, or recover lost GDP growth.
- Second, the end of the Russia-Ukraine war would alleviate investor concerns in the global markets. The Russia-Ukraine war has proved detrimental to European Banks and large entities in Russia and Ukraine. On a global scale, the conflict has raised rates across all commodities exposed to the Russian economy, including oil, energy, and long-term gas supply.
- Third, we can expect a positive response from the markets if governments can decrease inflation to 2% and hold down interest rates to less than 1%, as are Federal Reserve standards for acceptable inflation. With current inflation at 8% and Federal interest at 3%, we are a far cry from key recovery scenarios that will prop up a bull market.
Throughout these possible scenarios, the best thing that you can do is to have a calm outlook. Weigh your options, and look at the bigger picture before making any major investment decision.
Although the short-term look of the markets isn’t exactly positive, this is not a reason to fret. You are here to invest in the long-term. Remember, patience pays off in the markets.