Finance First, a little perspective... To start off, let’s define what we’re talking about when we talk about a “bear market.” By definition, a bear market is a stockmarket downturn of 20% or more, as measured by the recent market top. That makes it different from a “correction,” which is typically defined as a downturn of 10-20%. At the time of writing (early June), the U.S. market is firmly in bear market territory, down about 23%. Here in Canada, however, the TSE 60 index has fared far better, in no small part because of the tremendous performance of energy stocks – they’re only down 9%. But these numerical definitions don’t really capture the true impact of the downturn that we’ve seen, particularly when it comes to certain sectors which have been particularly mauled by the bear. The technology-heavy Nasdaq 100 index, for example, is down fully 31%. And even that number doesn’t really do justice to the carnage that some former market darlings have seen: Facebook (now Meta Systems) down 51%; Netflix down 71%; Covid vaccine-maker Moderna down 50%, to name just a few. What causes bear markets? There is no one cause for bear markets, which is one of the reasons why predicting when and where they will happen is so difficult. But here are the main culprits: Rising interest rates As the saying goes, money makes the world go ‘round. And when the cost of borrowing the money (a cost we typically call “interest”) rises, it can become more difficult for businesses to create more products and services, expand operations and hire more staff. In a similar fashion, consumers such as you and me can find it more expensive to borrow to buy a home or a new car, or even pay off the credit card at the end of the month. None of this is a big problem if rates rise slowly, giving businesses and people time to adjust. But when rates rise rapidly, it can create a kind of economic shock, as businesses and consumers cut back on their spending and try to account for the added cost of borrowing. Investors who try to anticipate that shock often sell shares in those businesses which will be most affected by the increased cost of borrowing money and/or the slowdown in consumer spending. Economic slowdowns Closely related to the above. Obviously, when consumers spend less, businesses hire fewer people, corporations sell fewer goods and services to customers and the slowdown affects corporate profits; sooner or later, the stock market reflects that weaker economy. One relatively recent example of this phenomenon would be the financial crisis of 2007-08, when a crash in U.S. housing prices spread to other sectors (particularly the financial sector) and caused a global stock sell-off. Politics The stock market is primarily a place of economics − but politics can have as much of an effect on stock prices as can corporate earnings. Changes in government, changes to taxation, tariffs and other regulations, and even outright war can all change the way in which investors perceive the future, which translates into what prices they’re willing to pay for stocks. The current conflict in Ukraine is one recent example. “Black swan” events Most of what happens in the world has been seen before in history. But every now and again, a scenario or event happens that seems to come out of nowhere, or that very few predicted. When such events happen, they can often cause a wave of worry to wash over the stock market, as investors become anxious about how business will adapt to the unexpected. Covid-19 is an obvious example here. Reality check Veteranmarket-watchers know that investing can be a very emotional activity. Most of the time, those emotions are positive: investors buy stocks because they believe that businesses will earn more profits in the future. Every now and again, however, investors do a “reality check” and re-think their positive assumptions and rosy predictions. The “tech wreck” of 2000 is a good example, when investors suddenly realized that many of the overhyped dot-com stocks were not living up to expectations and ended up selling almost everything high-tech as a result. All of the above Of course, it’s quite common to have multiple causes working at once. This seems to be the case right now: central banks are raising rates rapidly to combat inflation. At the same time, Russia decided to invade Ukraine. At the same time, the world is trying to recover fromCovidrelated supply-chain chaos. At the same time, many investors are waking up to the sky-high valuations of tech stocks, cryptocurrencies, “meme stocks” and other speculations and wondering whether a lot of the hype is, well, just hype. CSANews | SUMMER 2022 | 37
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