With the spread of COVID-19 around the world, businesses and individuals everywhere are feeling the economic impact. For example, as of March 15, 2020, the CDC recommended all gatherings of 50 or more people be canceled or avoided for at least eight weeks.1 And in many states or cities, small businesses including bars, nightclubs, restaurants, cafes, boutiques and more are shutting down.
On March 11, 2020 we officially entered a bear market.2 It was the fastest plunge into a bear market in history. Like many Americans, you’ve likely heard the terms “bull” and “bear” in regards to the market, but what do they mean exactly, and how does a bear market relate to a recession? We’ll discuss below.
What Is a Bear Market?
A bear market refers to a period of time in which stock prices decline and the overall market outlook is pessimistic. Beyond the daily fluctuations of the market, a bear market is typically marked by a 20 percent or more fall in the market index over at least a two-month period.3
Bear markets throughout history have varied greatly in severity and length of time. For example, two of the longest bear markets experienced in America include the Stock Market Crash of 1929, which lasted 34 months and the more recent 2007 financial crisis, in which the bear market lasted over 27 months.4
Today's market tumbled into bear territory in just over 20 trading days, far quicker than other declines of such caliber. As of March 16, 2020, the U.S. stock market had dropped 27% in a little over three weeks, wiping out tens of trillions of dollars, and making it the fastest bear market in history.
What Causes a Bear Market?
In simple terms, a bear market is caused when all parties lose confidence. Consumers stop buying, businesses stop selling and investors begin pulling out of the market. As confidence in the market lessens, expansion in the business cycle grinds to a halt. In the recent move to a bear market, this loss of confidence was triggered by the stock market plummet in March 2020 due to the spread of COVID-19.
What Is a Business Cycle?
The business cycle includes four stages: expansion, peak, recession and trough.6 If you picture these as a mountain, expansion is the phase in which businesses are profiting (climbing upwards), the market is going strong and confidence is high. During this time, we experience a bull market.
On the other hand, a recession is the contraction phase of the business cycle (moving down the mountain). Confidence diminishes, economic growth begins to weaken, unemployment rates rise and a generally cynical view develops toward the market. This is when we experience a bear market.
In between these two phases lie the transitioning times, the peak and trough. Just as it sounds, the peak indicates the “top of the mountain,” serving as the transition between expansion and market contraction. A trough lies at the bottom of the recession phase and serves as the transition between recession and expansion.
Is a Recession Imminent?
According to the National Bureau of Economic Research (NBER), a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales.”7
Indicators of a recession hitting America may include:
- Recent graduates unable to secure jobs
- An increase in businesses going bankrupt
- Unemployment rates rising
- Housing market collapsing
- Consumers buying less
While the stock market entering a bear market is common amidst a recession, the stock market is not necessarily an indicator that a recession is about to happen. Instead, there are certain indicators and warning signs such as a slow down in production in the manufacturing sector, retail sales and the real gross domestic product (GDP) growth rate declining.
While the impact of a recession can be long-lasting, the recession itself typically only lasts between 9 and 18 months, according to the NBER.8
With uncertainty surrounding the economic stability of our country, it’s okay to have fears and anxieties surrounding your own savings and investments. The most productive course of action from here is to reach out to us (or whoever your trusted advisor might be) and discuss your options. It is easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using research-backed data and a level head.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.