What is a bear market?
When prices fall by at least 20% from their highs, investors call it a “bear market.”
The AEX index is currently around 643 points, about 22% lower than the high of 827.57 points on November 17.
In the US, prices continued to fall. The broad S&P 500 index has already lost 23% since early January, while the technology index Nasdaq lost about 33%.
Are all rates 20% lower?
No, when we ask if there is a bear market, we look at the stock index, which is kind of an average of the major stocks. Individual share prices may have fallen more or less as a result.
How have prices fallen so much?
Investors have become more pessimistic about the economy and therefore corporate earnings. There are several reasons for this.
For example, the economy has recovered faster than expected after corona, which has led to disruptions in supply chains, partly due to the lockdowns in China. As a result, car manufacturers can produce fewer cars, for example because there are not enough raw materials or parts.
In addition, rising fuel prices (partly as a result of the Russian invasion of Ukraine) mean consumers have less to spend, as do corporate profits.
Interest rates are also rising. Central banks such as the Fed in the US and the ECB in the Eurozone are trying to reduce high inflation. But it makes borrowing more expensive for businesses and consumers, meaning they have to spend less.
How bad is the bear market?
If you own stocks, you’ve probably lost money recently. But unless you sell it, it’s just a waste of paper. Prices can bounce back later and so recent losses can be partially or completely reversed.
How long does a bear market last?
Unfortunately, as the well-known stock market wisdom goes, basically nothing is heard. Goldman Sachs said the S&P 500 index fell 24% on average in the bear market.
Usually, a bear market ends when prices rise 20% more from their lows. Of course, this does not mean that the price loss is fully recovered.
Will there be a recession?
A bear market is often a harbinger of a recession, but not always. Reuters writes that since 1948 there has been a recession in nine out of twelve cases in the US. There have also been three recessions that were not preceded by a bear market.
In any case, the Fed thinks that the US will not enter a recession despite the rise in interest rates.
Three weeks ago, economists at ABN Amro had not predicted a recession in the Netherlands. But that will change if Russia stops gas supplies to Europe, according to ABN Amro.
Rabobank economists expect a “mild” recession in the last quarter of 2022 and the first quarter of next year.
What should you do now as an investor?
Without giving investment advice, RTL Z stock commentator Durk Veenstra thinks it is probably already priced in. Veenstra says that after a drop of 20% or more, it usually doesn’t take long before the stock market starts to recover.
There is no housing crisis, the labor market is tight, so the economy itself is doing well, he says. “If the problems of high energy prices and the supply of raw materials and parts can be solved, things will probably go back to normal,” he thinks.
But again, past performance is no guarantee for the future and no one has a crystal ball.
Source: RTL
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