The Dow is in a bear market. What does that mean?

Raindrops hang from a Wall Street sign in front of the New York Stock Exchange in Manhattan in New York City, New York, U.S. October 26, 2020. REUTERS/Mike Segar/File Photo

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September 26 (Reuters) – The Dow Jones Industrial Average, the oldest of Wall Street’s three main stock indexes, fell 1.1% on Monday, extending the decline from its January peak to more than 20%, a common definition for a bear market.

Fears that the Federal Reserve’s war on decades-long inflation could push the US economy into a downturn have sent the US stock market tumbling in 2022.

With the S&P 500 (.SPX) and Nasdaq (.IXIC) already down about 23% and 32% from their record highs, respectively, confirmation that the Dow is also in a bear market is just the latest milestone in the market turmoil from 2022.

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While the Dow is a much narrower index than the other two, with only 30 large-cap companies, it’s historically the one Main Street watches most closely.

On Wall Street, the terms “bull” and “bear” markets are often used to characterize broad uptrends or downtrends in asset prices. Many investors use the terms loosely, and analysts don’t always share the same specific definitions, particularly when it comes to the end of a bear market.

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In fact, to professionals, these are just labels that matter less than fundamentals such as corporate earnings and valuations, interest rates, and economic conditions.

Some investors define a bear market specifically as a fall of at least 20% in a stock or index from its previous peak, with the peak defining the beginning of the bear market, which is only recognized in hindsight after the 20% fall.

Similarly, some define a bull market as a 20% rise from a previous low. However, the S&P Dow Jones indices, which manage the S&P 500 and the Dow Jones Industrial Average, have an even more nuanced definition.

A fall of 20% or more from a high followed by a rise of 20% from that lower level would still leave an index below its previous high, a situation that Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, describes a bear market as a “bullish rally.”

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In fact, investors can only be sure they are in a new bull market when a new all-time high is set, and at that point the previous low would mark the end of the bear market and the start of the new bull market, according to S&P Dow Jones indices.

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Reporting by Noel Randewich; Edited by Alden Bentley and Nick Zieminski

Our standards: The Thomson Reuters Trust Principles.