What makes a bear market? Wall Street term explained

In most cases, profits are made in the stock market as the price of a share rises. But short sellers can make money as value drops and lose money as it rises.

The last bear market happened just two years ago, but this would still be a first for those investors that got their start trading on their phones during the pandemic. Thanks in large part to extraordinary actions by the Federal Reserve, stocks have for years seemed to go largely in only one direction: up. The "buy the dip" rallying cry after every market slide has grown fainter after stinging losses and severe plunges in risky assets like cryptocurrencies.

The Dow industrials sank 2.8% and the tech-heavy Nasdaq composite, which already was in a bear market, tumbled 4.7%. Last month, the Fed signaled additional rate increases of double the usual amount are likely in upcoming months. Consumer prices are at the highest level in four decades, and rose 8.6% in May compared with a year ago.

If customers are paying more to borrow money, they can’t buy as much stuff, so less revenue flows to a company’s bottom line. Stocks tend to track profits over time. Higher rates also make investors less willing to pay elevated prices for stocks, which are riskier than bonds, when bonds are suddenly paying more in interest thanks to the Fed.

While dumping stocks would stop the bleeding, it would also prevent any potential gains. Many of the best days for Wall Street have occurred either during a bear market or just after the end of one. That includes two separate days in the middle of the 2007-2009 bear market where the S&P 500 surged roughly 11%, as well as leaps of better than 9% during and shortly after the roughly monthlong 2020 bear market.

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