A bear market is defined as a pullback of at least 20% in the price of equities. What has caused the bear market events of this century?
The shares of technology giant Apple (NASDAQ: AAPL) are currently trading 18.3% below all-time highs, suggesting it might soon enter bear market territory. Similar to most other stocks, Apple is wrestling with several macroeconomic issues that include rising interest rates, higher inflation, supply chain disruptions, steep valuations, and the prospect of an upcoming recession, which is likely to negatively impact revenue and earnings in the near term.
These factors have weighed on Apple, dragging its stock significantly lower in 2022. Investors and analysts are worried that lower consumer spending and inflation will hurt top-line growth, while multiple interest rate hikes will narrow profit margins. If these headwinds persist, there is a good chance that Apple and several other large-cap stocks will trade at a lower valuation or even enter a bear market.
What is a bear market?
As a rule of thumb, a decline of more than 20% for any stock or index from record highs is defined as a bear market.
This is different from a market correction, which is a decline of between 10% and 20% for a stock or index. The two terms are used interchangeably, but there is a stark difference between a bear market and a market correction.
There may be several causes of a bear market. Since the start of 1900, there have been 33 bear markets. So, on average, a bear market event takes place every 3.7 years. But since 1956, there have been 11 bear markets which suggests it occurs every six years.
A few of the most recent bear markets include:
The COVID-19 pandemic
Between February and March 2020, the S&P 500 index slumped by 36% due to the COVID-19, which resulted in global lockdowns and a spike in unemployment numbers.
As governments imposed restrictions, several industries such as energy, airline, tourism, and traditional retail were hit hard. The global economy’s uncertainty resulted in one of the most rapid stock market plunges in history.
The Financial Crisis of 2008-09
The S&P 500 index plunged around 56% from all-time highs during the subprime mortgage lending crisis of 2008-09. As a result, a slew of banking and financial institutions were on the brink of bankruptcy. The Federal Reserve infused billions of dollars via bailouts and recapitalized the banks to prevent the economy from collapsing further.
The Dot-Com Bubble
The widespread adoption of the internet translated into a steep rise in stock prices of technology companies. For instance, Cisco stock rose from $6 in May 1997 to $75 in April 2000. However, when the Dot-Com bubble burst, the tech-heavy Nasdaq index fell 75% from all-time highs, wiping off massive investor wealth in the process.
While bear markets are tough for investors they are a natural part of market cycles. On average a bear market lasts for just less than 10 months. But every bear market has been followed by a bull market rally which typically pushes stocks significantly higher on the back of improved macroeconomic conditions.