Bull and bear markets, recessions, inflation and the Fed: what they mean for investors

Bull, bear and correction

• Bull market: a sustained period of rising prices, often defined as a rise of 20% or more from a low.
• Correction: a drop of 10% or more from a recent high.
• Bear market: a fall of 20% or more, typically lasting months or longer.

These are labels applied after the fact. History shows falls of this size happen from time to time and that recoveries have followed, but past patterns are not a promise.

Recession

A recession is a significant decline in economic activity across the economy, lasting more than a few months. Stocks often fall ahead of or during recessions, sometimes before the economy visibly weakens, and often recover before it does. That timing makes “wait for the recession to pass” a hard strategy.

Inflation

Inflation is the general rise in prices over time, which reduces what each dollar buys. Cash loses purchasing power when inflation is above the interest it earns. Companies that can raise prices may hold up better than those that cannot, but outcomes vary widely.

The Fed and interest rates

The US central bank, the Federal Reserve (“the Fed”), sets a short-term policy interest rate to balance inflation and employment. Higher rates make borrowing costlier and can lower stock and bond valuations; lower rates tend to do the opposite. Its meeting dates are published on its official website. Markets often move on what the Fed signals, not just what it does.

Why stocks go up and down

Over the long run, prices follow company earnings. Over the short run, they follow expectations and mood. That is why a market can fall on good news and rise on bad. When your own stock drops, ask three questions: Did the company’s outlook change? Did the whole market or sector fall? Did my reason for holding it change?

Will the market crash?

Nobody knows. Forecasts, from banks to influencers, are right sometimes and wrong often, and a forecaster who is early is wrong. A better question is whether you could hold through a crash if one arrived next year. If not, change the portfolio now, calmly, rather than later in a panic.

What about not investing at all?

Staying in cash avoids market swings but exposes you to inflation and forgoes any growth. That might be right for money you need soon and wrong for money you will not touch for decades.

You cannot control the economy. You can control costs, diversification, contribution habits and whether you panic.