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Are We Finally Entering a Bear Market?

The stock market has been volatile in the past few weeks, experiencing massive declines and occasional runs that make up for those declines. After one of if not the longest-running bull markets in the history of the United States, we may finally be reversing course into a bear market. But are the recent declines and volatile fluctuations enough to put us in bear market territory?

Defining a Bear Market

One of the key problems with this question is that there’s no single agreed-upon way to define what a bear market is. In general, a bear market is one in which prices of securities are expected to fall over a period of time, somewhat consistently. Investopedia defines this as a downturn of 20 percent or more from a peak over a 2-month period or longer, but this isn’t a comprehensive or universal definition.

By that definition, we can look at the S&P 500 and determine the peak—somewhere around 2,930—around October, and the current price—around 2,650 as of the time of this article’s writing—and determine a drop of roughly 13 percent over the course of 2 months. That puts us close to Investopedia’s generalized definition, but not close enough. If prices continue to decline in the next few weeks, it could easily enter the standard definition of a bear market.

Economic Factors

When people talk about bear markets, though, they’re usually less concerned about a two-month downturn and are more concerned about a period of several months to a year or longer of declining prices. So is it possible that we’ll see this trend continue well into 2019?

Let’s take a look at some of the economic factors to consider:

  • The trade war. No small part of the recent volatility has been attributable to the budding “trade war” between the United States and China. Many big companies rely on trade between these two countries, so when new tariffs and regulations are introduced, their profitability is threatened, and when profitability is threatened, investors tend to panic. There has been an ebb and flow to conceptions about the trade war, fueled by threats, actions, and takebacks on both sides. It’s hard to say how U.S.-China relations will develop in the coming months and years, but if the trade war heats up before it resolves, you can bet market prices will continue to slide.

  • Entrepreneurship and business creation. Economic growth depends heavily on entrepreneurship and new business creation, and thankfully, it’s still incredibly easy for entrepreneurs to start new businesses. Entrepreneurship rates remain high, as does funding for new startups, so it’s unlikely that innovation and entrepreneurship will slow anytime soon.

  • Inflated prices. One problem that analysts frequently point out is that market prices may be too high compared to the actual values of companies—especially when you look at high-profile tech companies, for which consumer expectations are at an all-time high. If stock prices are higher than what’s fair, eventually there will be a correction, where prices sink back to where they “should” be. Given the market is widely regarded to be overpriced, even considering the recent downturns, it’s only natural that they’ll come to settle at a more reasonable price in the near future.

  • Company earnings. Much will also depend on company earnings, as they are announced in the coming months and years. If companies are able to meet or exceed consumer expectations, and the economic growth rate in the United States continues to climb overall, there’s no real reason for stock prices to decline. For the past year, companies have been doing fine, with few signs of slowed economic momentum, but high consumer expectations and changes to the market in the near future may jeopardize this momentum.

  • Unemployment. Unemployment is also a predicting factor for stock market prices (as well as economic growth). Through November 2018, unemployment has remained at roughly 3.7 percent, which is one of the lowest rates of unemployment we’ve seen since before 2008. There’s a feedback loop between unemployment and economic health, so this doesn’t mean we’re out of the woods, but it’s a promising sign that a bear market isn’t in the near future.

  • Consumer optimism. At the end of the day, prices are determined by investors. When investors are optimistic, prices climb higher. When they’re pessimistic, prices tumble lower. Despite periods of increasing and decreasing pessimism, after the recent volatility in the stock market, investors seem to have reverted back to their average. That’s a sign that prices are likely to stabilize in the near future, but it’s hard to tell where consumer confidence will change in the coming months.

There’s been enough of a downturn already to almost qualify us for a bear market, but we’re not there yet. There are too many economic variables to consider to say whether we’re headed for a long-term bear market or not, but the signals seem to be mixed; there’s evidence to suggest that we’re ready for a massive downturn, and evidence that the economy will keep running strong for months to years to come.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.

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