US stock market fall: US indices enter bear market, what should investors do now?

The last few days have not been good for equity investors, including those who invest in the US market. All major US indices crashed recently, and now they have entered a bear market. What does it mean for investors, and what should they do in such situations? Investors are looking for answers to these questions as the recent fall has tested the patience of most investors. Let us understand the market situation.

What is a bear market?

A bear market is defined as a 20% drop in price from recent highs. It could be specific to a stock or an entire index like NASDAQ. 

Bear markets are characterized by investors' low confidence and pessimism. During this period, investors ignore any good news and continue selling. It takes the price down even further.

Below is numbers related to the fall of different US indices:

• The S&P 500 reached a new high in January. Since then, it has fallen more than 23% to enter a bear market.
• Dow made a high of 36,585 on January 4. On September 26, it stood at 29,260, a fall of 20% from the recent peak.
• The Nasdaq has fallen the most from its recent peak of 15,832 in January. Currently, it is down more than 30% from its recent peak.

The above number confirms that all major indices are in a bear market in the US.

Why are US indices in a bear market?

The US market is falling because of events that are all interlinked. Below are reasons that are directly or indirectly impacting the market:

Inflation: Inflation in the US has been on the rise and is well outside the Fed's comfort zone (2 to 4 percent). The government and Fed are working hard to bring it down. US inflation in August rose to 8.26% on-year above analysts' estimates.

Interest Rates: One of the ways in which the Federal Reserve can bring down the inflation numbers is by increasing interest rates. Recently last week Fed hiked interest rates by another 0.75% to control the rising inflation. to A higher interest rate is not ideal for businesses as it puts breaks on demand. It is not good for the overall economy.

Recession fear: There is fear among investors with rising interest rates that the US economy will slow down and will enter a recession. It will impact the businesses of all the companies, and they will report lower revenue numbers. Investors are taking that into account, and hence we are seeing heavy selling in the US market.

How long does the bear market last?

Generally, a bear market occurs before or after the economy moves into a recession. However, it may not always be the case. Investors track numbers like hiring, inflation, interest rates, and wage growth more carefully during such periods. Bear markets tend to be shorter than bull markets. Below are some interesting facts about the bear market:

• The bear market lasts 289 days on average, compared to 991 days for bull markets.
• Since 1928, the S&P 500 Index has experienced 26 bear markets.
• The average duration between two bear markets is 3.6 years.
• They are less statistically severe, with an average loss of 33%.

How to invest in a bear market?

As mentioned above, the bear market is part of the equity market cycle, and you cannot escape it. If you stay invested in the market for 50 years, you will come across approximately 14 bear markets.

Instead of fearing it, you must look at it as an opportunity to put your money to work. Below are some rules to follow when investing in a bear market:

Think long term: One fear investors have in a bear market is - how much more the market will fall. No one knows the answer to this question - there is no point worrying about it. If you are too worried to invest in a bear market - remind yourself of your financial goals. If you are in the market for the long term, you will surely make gains when the cycle changes.

Buy quality stocks: If the bear market lasts long enough, some companies could go out of business. Investors must focus on buying quality stocks only. Fundamentally weak stocks fall the most during a bear market, and recovering losses is never easy. For a 50% fall in stock, it needs to rise 100% to recover your capital.

Don't wait for the bottom: Most investors don't invest in the bear market as they wait for the right time - the bottom. Even the best minds in the financial markets cannot accurately predict the bottom. Therefore, keep buying the dips when the market falls.