The U.S. stock market has entered a bear market, with all three major indexes down more than 20% from their peak in January.
On Wall Street, the terms “bull” and “bear” markets are often used to characterize broad upward or downward trends in asset prices. A “bear market” is commonly used to describe the stock market once asset prices have fallen 20% from their recent highs, although not all analysts share the same general definition.
The three most prominent stock indexes include the Dow Jones Industrial Average, Wall Street’s oldest stock index, the S&P 500, and the Nasdaq. The three indexes measure changes in the share prices of various companies listed on one of two stock exchanges: the New York Stock Exchange (NYSE) and the Nasdaq Exchange.
The Dow is a price-weighted index that tracks 30 large, publicly-owned companies trading on the NYSE and the Nasdaq. The Dow is a much narrower index than the other two and is the one Main Street watches most closely.
The S&P 500 is a market-capitalization-weighted index of the 500 leading publicly traded companies in the U.S. The Nasdaq is an index of more than 3,700 stocks listed on the Nasdaq exchange.
On Wednesday, the Dow dropped by 1.54%, the S&P 500 fell by 2.11%, and the Nasdaq, which had the largest Wednesday decline of the three indexes, plummeted by 2.8% during regular trading hours.
Since the start of the year, the S&P 500 and Nasdaq have fallen by roughly 23% and 32%, respectively, with the Dow Jones becoming the third index to reach the 20% bear market milestone.
Since November of last year, the stock market has been in a state of constant volatility, tumbling most of 2022 as the Federal Reserve wages war against decades-high inflation and the damaging effects it has on the country.
Prior to entering into a bear market this year, the U.S. stock market spent more than a decade in a “bull market,” excluding the period between March and April of 2020 when COVID-19 wreaked havoc on global markets.
A common phenomenon during a bear market is a “bear market rally,” which is described as a drop of 20% or more from a high, followed by a 20% gain from that lower level, according to S&P Dow Jones Indices Senior Index Analyst Howard Silverblatt.
In the end, investors can only be sure they have truly exited a bear market and entered a bull market once a new all-time high has been reached. Once an all-time high is reached, the previous low would officially signal an end to the bear market and the beginning of a new bull market, according to S&P Dow Jones Indices.