(NEW YORK) — Lately, the stock market has taken a thrashing.
The Nasdaq and S&P 500 have each fallen for seven consecutive weeks. The Dow Jones Industrial Average has fared even worse, dropping for eight weeks straight, the longest such losing streak for the index since the early years of the Great Depression, in 1932.
The losses on Wall Street owe in no small part to the wider economy’s most pressing problem: sky-high inflation, Edward Moya, a senior market analyst at broker OANDA, told ABC News. For months, strong consumer spending and snarled supply chains have sent prices soaring for everyday expenses like food and gas, as well as for materials like computer chips that many US companies rely upon.
In response, the Federal Reserve has raised its benchmark interest rate to a range of 0.75% to 1%, and the central bank has signaled a series of additional hikes.
The goal is to slow down the economy, which in theory should eat away at demand and slash inflation. But the approach all but ensures a downturn for stocks, and runs the risk of hitting the brakes on the economy so hard that it triggers a wider contraction.
“The stock market is down — I’m not surprised, that’s by design,” Mark Zandi, the chief economist at Moody’s, told ABC News.
But the rate hikes at the Fed could send the economy into a downturn, especially if an unexpected headwind puts further strain on the economy, Zandi said.
“The risks of this going off the rails are pretty high,” he said. “So we’re vulnerable.”
As the market and economy teeter, buzzwords like “correction,” “bear market” and even “recession” are coming back into the conversation, conjuring images of layoffs, foreclosures and bankruptcies.
But the definitions and implications of these terms can get lost in the tumult, stoking outsized panic in some cases and insufficient caution in others.
What is a bear market?
The S&P 500 made headlines last Friday when it briefly entered bear market territory, which generally means a 20% drop since the index’s most recent high over at least a two-month period. On Friday afternoon, the index had fallen 1.9% for the day, crossing the threshold for a bear market. But it rallied to end the trading day up 0.01% point, elevating it just barely outside of bear market territory. As of market close on Monday, it had ticked up even further.
For its part, the tech-heavy Nasdaq entered a bear market on March 7, and as of market close on Monday had fallen more than 30% since a record high in November.
The prospect of a bear market, and the pessimistic investment environment that it entails, carry disconcerting near-term implications. In the 26 bear markets since 1929, the S&P 500 — the index that most people’s 401(k)’s track — has lost an average of 35.6% of its value over a typical duration of 289 days or about 9 ½ months, according to a report from Hartford Funds.
In comparison with a bear market, a correction entails a milder stock market decline, amounting to a drop of 10% to 20% from the most recent high. The S&P 500 has been in correction territory since late February.
For some traders who jumped into the market during its pandemic boom — when the S&P 500 rose some 108% from March 2020 to its peak in early January — the current downturn may be their first. But a bear market is an expected part of the stock market cycle, especially in light of the pandemic stimulus that flooded the economy in the form of direct payments, low interest rates and other measures, Moya, the senior market analyst, told ABC News.
“We’ve seen a historic amount of support help stabilize the economy,” Moya said. “Also, what that did was inflate risky assets, which included the stock market.”
The currently depressed stock prices should appeal to patient traders, Moya added.
“If you’re a long-term investor, and you believe in the US. economy and that the froth is being taken out of the market,” he said. “These levels should be attractive.”
What is a recession?
The unrelenting market decline has raised fears of a recession.
Many observers define a recession through the shorthand metric of two consecutive quarters of decline in a nation’s inflation-adjusted gross domestic product, or GDP. A country’s GDP is the total value of goods and services that it produces.
U.S. GDP shrank at an annual rate of 1.4% over the first three months of this year, the worst quarterly performance since the recession brought about by the coronavirus in 2020. If the GDP contracts over the second quarter of the year, that would qualify the downturn as a recession in many people’s eyes.
The National Bureau of Economic Research, or NBER, a research organization seen as an authority on measuring economic performance, uses a more complicated definition that takes into account several indicators that must convey “a significant decline in economic activity spread across the economy, lasting more than a few months,” the group says. This definition determines whether a downturn is formally designated as a recession, since the NBER is the official arbiter on the subject.
A report released last year by the NBER showed that the pandemic-induced recession of 2020 lasted only two months. By comparison, the organization said that the Great Recession spanned from December 2007 to June 2009, lasting 18 months.
“The R-word is something that triggers a lot of fear and panic for your average American because normally it suggests the job market is taking a turn for the worse and that consumer spending will weaken significantly,” Moya, the senior market analyst, said.
Zandi, the chief economist, put the odds of a recession over the next 12 months at 1 in 3. But he downplayed the severity of a potential recession, noting that he doesn’t see any “major imbalances” in the economy.
“It’s likely to be short and mild,” he said. “I don’t think it’s a reason to run for the bunkers but it’s a reason to be cautious.”
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