US Stocks Officially Enter Bear Market Territory

Monday 13th June was the day that the US Financial Market, proxied by the S&P 500 Index, officially entered a “Bear Market” as investors sharply sell off.  

To the retail investor with little financial knowledge, this may be a headline that sparks your interest. Yet, you may have very little understanding of what it means. The purpose of this short article is to clear up the financial jargon associated with recent developments within the investment world. This post comes as a series of experimental posts for my new investment coaching service.

First, let us clear up what the headline implies. The US Stock Market is an exchange, or group of exchanges within the United States where investors, traders or even speculators come to buy and sell stocks and shares. Stocks and shares can best be described as a percentage of ownership within a company listed on the any exchange. The exchange in question here is the S&P 500, which represents the 500 largest companies in the United States.

What is a “Bear Market” and how might it affect you?

A Bear Market is when a financial market, such as the S&P500 Index falls, from its previous peak by more than 20%. In this case, US stocks are down from their January highs. A Bull Market is an exact opposite.  Although financial markets are not necessarily the cause of economic status, history tells us that a bear market can often precede a wider felt recession. A recession is where the output measured by Gross Domestic Product (GDP) declines in two consecutive quarters (6 months). You’re probably thinking… Even more financial jargon… What is important to know, is that a recession can often coincide with business failures due to lower demand, resulting in job losses as companies look to cut back on their spending and clearly, this is bad news.

To dig deeper, you may not think this could affect you. However, undoubtedly you will have some exposure to markets through your pension. A pension is a pot of money that you contribute towards throughout your working life. That pot of money is often invested in the stock market. If the stock market goes down, then so will the amount of money in your retirement pot at the end. This will affect individuals differently depending on their age or however close to retirement they are.

What is happening?

If you have been following the markets closely for the last few years then this might seem like rather normal behaviour, through such a remarkably volatile period in history. Market fluctuations caused by COVID wreaked havoc during March 2020 which was the last bear market to date. One of the shortest on records and depending on your market timing, you could have been in for one hell of a roller coaster ride. Following astronomical gains from then on, there was ample opportunity to make considerable profits as earnings skyrocketed, particularly within the tech sector. As recently as May 22 we saw markets fall off a cliff to only flirt with bear territory, before ending the day slightly recovered. Although this is happening in the US, we can see this trend moving in tandem across the world.

What caused it?

There are countless scenarios that could kickstart a sell off. This one, according to one analyst speaking on Bloomberg Day Break, suggests it appears that investors have front-run the economic oligarchs that decide on monetary policy. In other words, the people seem to have sold off in anticipation of interest rates rising even higher, currently at 0.75%. These rates often influence the rates offered at your local bank. The reason this is happening is that it can be used to tackle inflation by slowing economic growth. This Inflation battle may well be fuelled by rising oil prices because of increased demand following the re-opening of the economy, and undoubtedly the political conflict in Russia and Ukraine resulting in international sanctions that have squeezed supply.

What are other investors doing?

According to Trading212 the greatest change in weekly traders is within the Vanguard S&P 500 ETF with 82% buyers Vs 18% Sellers. The price has generally been on the decline, indicating that most of these sales have been of a greater magnitude despite the lesser volume of traders. This Exchange Traded Fund (ETF) is a financial product that you can invest in which is a low-cost way to track the performance of the S&P 500.

What are the options available?

Benjamin Graham, a close friend, and mentor of the renowned Warren Buffet, promotes a form of ‘Dollar-Cost Averaging’ in a market downfall in his famous book, The Intelligent Investor. Benjamin contributed a lot of his success to this type of strategy, however, as the famous saying goes; Past performance is no indication of future returns.

What else is happening?

#Crypto joins the markets freefall, with significant drops in both Bitcoin and Ethereum as Coinbase prepares to cut up to a fifth of its workforce. #PetrolPrices continue to rise to above £2.00 per litre. #ChinaTensions rise as it is accused of developing new weapons. #BrexitDrama as Johnson decides to amend the Brexit deal concerning Northern Ireland.