A look at what happens when stocks enter a bear market

AP – Wall Street’s staggering skid that began less than three weeks ago has pulled the Dow Jones Industrial Average into what’s known as a bear market.

After a string of sharp losses, the Dow has now fallen more than 20 per cent from its last peak on February 12.

The S&P 500, the index most investors pay attention to, moved within striking distance of its own bear market on Wednesday, as did the Nasdaq. Both indexes are in a correction, down at least 10 per cent from their most recent all-time highs.

Here are some common questions asked about bear markets and corrections and what they mean for average investors:

HOW IS A BEAR MARKET DIFFERENT FROM A MARKET CORRECTION?

A correction is Wall Street’s term for an index like the S&P 500, the Dow Jones Industrial Average, or even an individual stock, that’s fallen 10 per cent or more from a recent high. A bear market occurs when the index or stock falls 20 per cent or more from the peak for a sustained period of time.

Corrections are common during bull markets, and are considered normal and even healthy. They allow markets to remove speculative froth after a big run-up and give investors a chance to buy stocks at lower prices.

The major United States (US) stock indexes entered a correction this month amid mounting fears about the impact that the coronavirus outbreak could have on the global economy and company earnings growth. An oil market price war this week that led analysts to lower their profit forecasts for energy companies fueled more selling on Wall Street.

A board above the floor of the New York Stock Exchange shows the closing number for the Dow Jones Industrial Average on March 11. PHOTO: AP

All told, the Dow fell 1,464.94 points Wednesday to 23,553.22. That’s 20.3 per cent below its record close of 29,551.42 on February. 12. The S&P 500 index slid 140.85 points to 2,741.38. It’s now down 19 per cent from its high of 3,386.15 on February 19. The Nasdaq dropped 392.20 points to 7,952.05, or 19 per cent below its peak of 9,817.18 on February 19.

WHAT’S BOTHERING INVESTORS?

The outbreak of the coronavirus that originated in China has quickly grown into a pandemic that is threatening major sectors of the global economy, stoking fear that the US and other economies could be tipped into a recession.

Many companies, including airlines, cruise operators and big consumer technology manufacturers, have warned their earnings will take a hit this year due to the economic fallout from the outbreak.

Investors remain uncertain over whether action taken by the Federal Reserve and the Trump administration to shield the economy will be effective or arrive quickly enough to prevent widespread economic pain.

More recently, a sharp drop in crude oil prices has further dimmed the overall outlook for corporate profits this year and next. Company profits tend to be the biggest driver of stock market gains.

HOW OFTEN DO MARKET CORRECTIONS BECOME BEAR MARKETS?

In the S&P 500, there have been 23 corrections since 1945 and 12 bear markets, not including the current near-bear market, said Sam Stovall, chief investment strategist for CFRA. That works out to corrections becoming bear markets a little less than 35 per cent of the time.

Should the S&P 500 enter a bear market before April 11, it would mark the fastest drop of 20 per cent by the index on record, Stovall said.

WHEN WAS THE LAST TIME WE HAD A BEAR MARKET?

The last bear market for the S&P 500 ran from October 9, 2007 through March 9, 2009. The index fell 56.8 per cent. In that 17-month period as the US housing downturn and mortgage crisis erupted, triggering a credit crunch.

HOW LONG DO BEAR MARKETS LAST AND HOW DEEP DO THEY GO?

On average, bear markets have lasted 14 months in the period since World War II, while market corrections have lasted an average of five months.

The S&P 500 index has fallen an average of 33 per cent during bear markets in that time. The biggest decline since 1945 occurred in the 2007-2009 bear market.

History shows that the faster an index enters into a bear market, the shorter they tend to be.

Historically, stocks take 270 days to fall into a bear market.

When the S&P 500 has fallen 20 per cent at a faster clip, the index has averaged a loss of 26 per cent, Stovall said.

WHAT ARE THE SIGNS THAT A CORRECTION OR A BEAR MARKET HAS ENDED?

Generally, investors look for a 20 per cent gain from a low point as well as sustained gains over at least a six-month period.

On average, bull markets last 4.5 years. In terms of the S&P 500, the current bull market has been going on for almost 11 years.

The shortest bear market for the S&P 500 was in 1990. It lasted almost three months, sliding 20 per cent in that period. The longest was a 61-month bear market that ended in March 1942 and cut the index by 60 per cent.