When Stocks Become Bear Markets

Monday’s S & P 500 plunged into the pandemic’s second bear market, surpassing the symbolic and worrisome threshold as stock prices plummeted following a sharp rise over the past two years.

Bear markets, where stocks have fallen by at least 20% from their recent peak, are relatively rare and often precede the recession. The sold-out raises concerns about lowering S & P from its peak on January 3 (reflecting the starting point of the new bear market), high inflation, war in Ukraine, Covid, and attempts to curb the Federal Reserve. Because it is. Economy.

This recession may last longer. And it threatens the stability of a large group of retirement-aged Americans who rely on 401 (k) and other stock-rich severance accounts: baby boomers.

Stocks fell sharply as the Federal Reserve abolished financial support. In addition to supporting the stock market, it also contributed to the fastest inflation rate in 40 years. S & P closed just above the bear market in May, before it recovered, but Friday’s share price plummeted again following the latest release of government data showing that inflation has accelerated again.

Equity traders are concerned that the Fed may be forced to curb economic growth as it curbs inflation and leads to a recession. Recessions often follow the bear market, but one does not always cause the other.

Paul Ashworth, Chief Economist of North America at Capital Economics, said: “The Fed will be very difficult and at some point it could be in recession.”

Not everyone believes that a recession is imminent this time. This is because there are economic areas that are better than at the moment of the previous bear market. The unemployment rate has been low for nearly half a century, and the economy has regained all but 800,000 of the 22 million jobs lost during the coronavirus-related blockade. While rising mortgage rates are beginning to weaken activity, housing (generally one of the biggest sources of wealth for Americans) remains strong.

Most Americans are exposed to the stock market through their retirement accounts. Traditional knowledge of young workers often did nothing, as the market eventually tended to rise again, while the market was declining sharply.

However, it can take several years for stock prices to return to their previous levels or reach new highs.

For older workers who are approaching retirement, or those who have already retired, waiting for it may not be an option.

“One of the big drawbacks of a 401 (k) is that even if you have enough savings, there are timing issues,” said Nancy Altman, co-director of the Social Security Administration. A social welfare non-profit organization focused on retirement benefits. “What should you do if the market is completely depressed?”

People near retirement age may be protected to some extent from market volatility due to the popularity of so-called target date funds, which automatically transfer 401 (k) money to bonds and other safer investments as they approach retirement age. There is sex. However, the 401 (k) plan can still have a big impact on the market downturn. For example, in 2008, the S & P 500 fell by 37%, resulting in a 24% drop in average 401 (k) account balances for people in their 50s.

People with severance accounts now hold more assets in stocks, as opposed to bonds and other combinations of investments. “People who keep most of their nest eggs in stock are becoming more complacent,” said Monique Morrissey, who specializes in retirement at the Left Think Tank Institute for Economic Policy. “There was a fundamental misunderstanding. Revenues are not always averaged.”

The bigger problem, according to Morrissey, is that many people are accustomed to the rise in the stock market. This is not a guarantee — especially in the short term.

“It’s not just the loss from January, that’s what’s going to happen,” she said. “If you rely on the amount in your 401 (k) to grow continuously, you may not be able to reach what you planned.”