InvestorQ : Is it true that the US has entered into a bear market?
Moii Chavate made post

Is it true that the US has entered into a bear market?

Tisha Malhotra answered.
8 months ago

The fall has been rapid and scary in the US markets. For example, on Friday 10th June, the Dow fell 800 points, another 880 points on 13th June and another 152 points on 14th June. Markets cracked after the US consumer inflation came in sharply higher at 8.6% for the month of May 2022. Let me get back to your query on US markets entering bear territory. The thumb definition is that a correction of 20% in the general indices from peak levels is classified as a bear market.

Firstly, the NASDAQ is down over 30% from peak levels. However, NASDAQ is not a general index as it is more focussed on digital and new technology plays. A much better proxy for a diversified index is the S&P 500. Now, even that index is down 20%, which means it is entering the bear market territory. Once it sustains for a few days below these levels, it would qualify as a full-fledged bear market. However sustenance is the key.

The big reason for the bear market was the ultra-hawkish approach of the US Fed as it goes about its monetary tightening. That entails big risks for investors. It increases bankruptcy risk for companies with high leverage and at the same time a number of financial companies may also face problems refinancing its short term debt and rolling over at competitive rates. That is likely to happen with most rates across the spectrum having gone up.

If that does happen, it will be the second bear market in 2 years, with the last bear market seen at the peak of the pandemic in early 2020. Remember, when rates go up, it increases the cost of debt and future cash flows are discounted to lower value. The reason this looks like a convincing bear market is that the crash extends across assets, including the new fangled asset classes like crypto currencies. Only energy prices are up and that is the problem.

It is hard to find solutions in a bear market but a sharp recovery in China as well as an early end to the Russia Ukraine war could help.