Stock markets and cryptocurrencies collapse for fear of a recession and high inflation. Here's what you should know about this crisis

The fear that soaring inflation will accelerate the Federal Reserve's interest rate hike this week and cause an economic recession sank the financial markets on Monday, leading the Standard & Poor's 500 and Dow Jones indices to enter a bear market (known as like

, comes on the heels of a cumulative drop of more than 20% from the previous high), and compounded the slump in cryptocurrencies, including Bitcoin and Ethereum.

The S&P 500 fell almost 4% at the beginning of the day;

the Dow Jones touched the 3% drop and the Nasdaq technology index reached 4.5%, although they recovered slightly later.

Bitcoin fell below $24,000, the lowest level since December 2020;

and Ethereum fell below $1,000.

The headquarters of Wall Street in New York John Minchillo / AP

The S&P 500 hit its lowest level since March 2021, down 21% from its last record.

"The odds of a June

at 3,400 [it's now at 3,800] have increased significantly," analyst Jonathan Krinsky was quoted as saying by CNBC.

The S&P 500 closed Friday at 3,900.

What is a bear market?

A bear market is a term used by Wall Street when an index, such as the S&P 500, the Dow Jones, or an individual stock falls 20% or more from a recent high over a sustained period of time.

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Why use a bear to represent a market crash?

The bears hibernate, and they represent a market that is retreating, explained Sam Stovall, a strategist at the firm CFRA, to The Associated Press news agency.

Wall Street's nickname for a rising stock market is a bull because they charge, he noted.

The most recent bear market for the S&P 500 was from February 19 to March 23, 2020. The index fell 34% in that period.

It was the shortest bear market in history.

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What worries investors?

The Federal Reserve has taken an aggressive turn away from propping up financial markets and the economy with rock-bottom interest rates, to focus on its fight against high inflation.

The Fed has already raised its key short-term interest rate from its all-time low near zero, prompting investors to move their money into riskier assets like stocks or cryptocurrencies for better returns.

In March, he indicated that further rate hikes of twice the usual rate are likely in the coming months.

Inflation is at its highest level in four decades, after prices rose 8.6% in May compared to a year ago.

The Fed's actions will slow the economy by raising the cost of borrowing.

The risk is that they could spark a recession if rates are raised too high or too quickly.

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Russia's war in Ukraine has also put upward pressure on inflation by pushing up commodity prices.

And concern about the Chinese economy, the world's second largest, has added to the general pessimism.

Will a recession be avoided?

Even if the Federal Reserve manages the delicate task of curbing inflation without triggering a recession, higher interest rates will continue to put downward pressure on stock prices.

If customers pay more for borrowed money, they can't buy as many things, reducing revenue on the company's income statement.

Stocks tend to follow earnings over time.

Higher rates also make investors less willing to pay high prices for stocks, which are riskier than bonds, when bonds suddenly pay more interest thanks to the Fed.

Critics pointed out that the stock market as a whole started the year high compared to history.

Big tech stocks and other pandemic winners were seen as the most expensive, and those stocks have taken the biggest hit as rates have risen.

But concern is spreading, with retailers signaling a change in consumer behaviour.

The blow of inflation costs the pocket about $450 a month.

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Stocks are down almost 35% on average when a bear market coincides with a recession, compared with a drop of almost 24% when the economy avoids a recession, according to Ryan Detrick, a strategist at LPL Financial.

Do we have to sell everything now?

If you need the money now or want to limit your losses, yes.

Otherwise, many advisers suggest riding out the ups and downs by remembering that swings are the price of the best returns stocks have provided over the long term.

While shedding shares would stop the bleeding, it would also prevent any potential gains.

Many of Wall Street's best days have come during a bear market or just after the end of one.

Advisors suggest investing money in stocks only if you won't need it for several years.

The S&P 500 has rallied from each of its previous bear markets to end up rising to another all-time high.

The stock market bear decade that followed the bursting of the digital bubble in 2000 was a brutal stretch, but stocks have often been able to recapture their highs within a few years.

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How long do bear markets last?

Since World War II, bear markets have taken an average of 13 months to go from high to low and 27 months to break even.

The S&P 500 Index has fallen an average of 33% during bear markets in that time.

The biggest decline since 1945 came in the 2007-2009 bear market, when the S&P 500 fell 57%.

History shows that the faster an index enters a bear market, the shallower it tends to be.

Historically, stocks have taken 251 days (8.3 months) to fall in a bear market.

When the S&P 500 has fallen 20% faster, the index has had an average loss of 28%.

The longest bear market lasted 61 months: it ended in March 1942 and reduced the index by 60%.

How do you know when a bear market is over?

Investors generally look for a 20% gain from a low point, as well as sustained gains for at least a six-month period.

It took less than three weeks for the stock to rise 20% from its low in March 2020.

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How to invest in a bear market

As an investor there is nothing you can do about the stock market or the economy as a whole, and stressing out will not bring you any positive results.

However, these tips from CNBC can help you manage your money in precarious times:

• Invest for the long term

In the same way that consumers take advantage of sales to go shopping, now may be a good time to invest in stocks, exchange-traded funds (also called ETFs) and index funds for less money, although be aware that the markets may continue to fall even for days or months.

• Tax-advantaged investment accounts

There are several investment accounts in which you can buy shares, such as a 401(k), an IRA, a Roth IRA, or a health savings account, also called an HSA.

They offer tax incentives that a normal taxable brokerage account does not have.

If you want to defer taxes until retirement, as you would with a 401(k), or invest for tax-free earnings, as you would with a Roth IRA, consider opening one of these accounts.

• The importance of the VIX index

Volatility is the defining characteristic of stock markets today, and the clearest signal investors can turn to when selling is exhausted is the VIX volatility index.

"When the VIX hits 36, we're really oversold, we've been in hard panic mode," Nicholas Colas, co-founder of DataTrek Research, told CNBC.

• The S&P 500 as a possible haven

Despite Monday's data, the S&P 500 "is a good place to be if we have a rally and not lose as much," Colas said.

The energy and health care sectors offer the most guarantees, in his opinion.

With information from