Bear markets, explained

Why they happen — and what to do with your money

A bear.
(Image credit: Illustrated | iStock)

That growl you just heard? It's the sound of a "bear market." Stocks on the S&P 500 dipped into bear territory this week when the index closed with prices at 21 percent below their recent high from January.

Bear markets are "fairly common," says the Money Watch column at CBS News. "But this slump could mark the first downturn for younger investors who started trading on their phones during the pandemic," which means a whole generation of new people is experiencing the stomach-churning panic that comes with watching your hard-earned money simply disappear.

What lessons do they need to learn to survive this bear attack? Here's everything you need to know:

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What are bear markets?

A bear market doesn't just mean that stocks have gone down — it means they're down a lot. There's actually a specific threshold experts use to determine if stocks have entered bear territory: It's "when stocks decline at least 20 percent from their recent peaks," William P. Davis, Karl Russell, and Stephen Gandel explain at The New York Times. (Bull markets have a vaguer definition: They're simply periods when "prices are rising or are expected to rise." Disasters require sharper calibration.)

The last bear market occurred during the early days of the pandemic in 2020, when S&P stocks lost a third of their value in just 33 days. They did recover their value in about six months, however.

Even if you're not an investor, the recent news should still be sobering, because bear markets "frequently precede a recession," the Times team says. Additionally, lots of Americans are investors even without thinking of themselves as active players in finance: The market's decline "threatens the stability of a large group of retirement-age Americans who are dependent on 401(k) and other stock-heavy retirement accounts: baby boomers."

One more thing: Why call them "bear" markets? "Bears hibernate, so bears represent a market that's retreating," explain Stan Choe and Alex Veiga at The Associated Press.

Why are stocks so depressed right now?

It's a little bit of everything. "There continues to be so much geopolitical uncertainty from the war in Ukraine to crackdowns on COVID in parts of Asia," says NPR's David Gura. But probably the biggest concern is inflation — and more specifically, the Federal Reserve's plan to battle inflation by raising interest rates "and making borrowing more expensive."

"Investors are worried that the Federal Reserve will have to drastically raise interest rates in order to fight inflation, which has been running at four-decade highs, and that its hikes could push the U.S. economy into a recession," Jordan Weissmann writes at Slate. But higher interest rates also "make it more profitable to park money in less risky assets like government debt" instead of riding with the less stable stock market where returns — and losses — can be much larger. So it's not just fear of a recession that's driving the sell-off, but also an opportunity for investors to increase their returns by parking their money where it's most likely to make more money. That's the name of the game, after all.

How can you protect your assets?

Stay calm. "If you're a young person who's putting some stocks in a 401(k) for retirement, don't worry about this," Columbia University's Laura Veldkamp tells CNBC. "Just keep doing what you're doing." That's because the trend of the market — over the long term — is up, up, up. So young investors with time to spare can afford to wait. "Have faith that it's going to come back in due course well before you retire," she says. "Usually, it takes a couple of years to recover some losses like this."

What about older investors? "If you're 50 years old and plan to retire in 15 years, your best bet may be to keep socking away money in your 401(k) or IRA in the same proportions as you have been," John Waggoner writes for AARP. He advises much the same for retirees: "Don't take withdrawals from your stock funds in a bear market unless you have no other choice." Why? Because those withdrawals "lock in the losses." Indeed, it's remarkably rare to find experts who suggest that retirees cash out when the market goes south. At most, they seem to recommend "small adjustments to your portfolio," Medora Lee writes for USA Today. "Though the market downturns may tempt you to sell in a panic, try to hold off, even if you must cut back on discretionary spending for a little while."

"History shows that the U.S. stock market has always recovered from declines in the past," says Jeff Sommer at the New York Times. "But I wouldn't put any money in stocks until I was sure that I could pay my bills first."

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