The S&P 500 just confirmed a bear market: What investors need to know

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The bear is back.

The S&P 500 on Monday confirmed what many investors have been saying for months: The large-cap benchmark is in the grips of a bear market.

Stocks suffered sharp losses Monday after major benchmarks saw their worst week since January. Much of the weakness was attributed to the Friday reading of the May consumer-price index, which surged to 8.6% year-over-year — a 40-year high. Investors fear the Federal Reserve will have to raise rates even more aggressively than already expected, risking recession in their effort to tame inflation.

The S&P 500 SPX, -3.88% fell around 151 points, or 3.9%, to finish near 3,750 on Monday, according to preliminary figures. That left it well below the 3,837.25 threshold that marked a 20% pullback from its Jan. 3 record finish, meeting the traditional definition of a bear market, according to Dow Jones Market Data.

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The S&P 500 briefly traded below the bear-market threshold in May, but didn’t close below it. Stocks subsequently bounced, but the rebound has since given way as recession fears have increased.

The Dow Jones Industrial Average DJIA, -2.79% finished with a loss of around 876 points, or 2.8%, near 30,518, after dropping more than 1,000 points at its session low. A close below 29,439.72 would put the blue-chip gauge into a bear market. The tech-heavy Nasdaq Composite COMP, -4.68%, which slumped into a bear market earlier this year, dropped 4.7%.

To be sure, many investors and analysts see a 20% pullback as an overly formal if not outdated metric, arguing that stocks have long been behaving in bearlike fashion. And note, that if the S&P 500 were to close below the threshold, the start of the bear market would be backdated to the Jan. 3 peak. A bear market is declared over once the S&P 500 has risen 20% from a low.

How have stocks behaved once a bear market has been confirmed?

There have been 17 bear — or near-bear— markets since World War II, said Ryan Detrick, chief market strategist for LPL Financial, in a May note. Generally speaking, the S&P 500 has fallen further once a bear market begins. And, he said, bear markets have, on average, lasted about a year, producing an average peak-to-trough decline of just shy of 30%. (see table below).

LPL Research

Beyond the averages, there’s a lot of variability in the length and depth of past bear markets. The steepest fall, a peak-to-trough decline of nearly 57%, occurred in the 17 months that marked the 17-month bear market that accompanied the 2007-2009 financial crisis. The longest was a 48.2% drop that ran for nearly 21 months in 1973-74. The shortest was the nearly 34% drop that took place over just 23 trading sessions as the onset of the COVID-19 pandemic sparked a global rout that bottomed out on March 23, 2020, and marked the start of the current bull market.