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A bear market is a period of time when the prices of stocks are falling. This term is often used to describe the stock market, but it can also be used to describe any type of market in which the prices are dropping. In a bear market, investors tend to sell their stocks and wait for the prices to rebound. The larger the drop, the closer the economy comes to a recession.
So, what is a bear market, and why is the term so important? In this guide, we unpick the term bear market, look closely at various historical examples, and more. Let’s jump in!
What Is a Bear Market?
Let’s unlock the core details behind the term bear market:
Bear market definition
The term “bear market” describes a stock market that is in decline for a period of months or years. As a rule of thumb, a stock market is in a bear market if it declines by more than 20% in a given period. This is usually preceded by at least a 20% rise in the stock market.
You may hear investors say they are “bearish” about a stock or a market; this indicates they believe the price will decline.
Bear market vs. bull market
A bull market is the opposite of a bear market. A market on a bull run will rise at least 20% over a given period, typically preceded by a 20% decline in market prices. On average, bull markets last longer than bear markets.
Bear market vs. correction
As markets rise and fall daily, there can often be large movements. If a market falls between 10% and 20%, this is typically referred to as a “correction,” meaning the market is correcting itself after an over-expansion. However, if the market declines by more than 20%, this is a bear market.
Bear Market Characteristics
Let’s take a look at some of the conditions associated with bear markets:
Interest rates dictate how much money businesses pay to borrow cash. If interest rates are high, it becomes expensive for businesses to service their debt. Inversely, if interest rates are low, businesses find it much easier to invest in growth. Higher interest rates are often associated with bear markets.
Low Investor Confidence
Investor confidence is one of the essential elements of any healthy market. Investors are less likely to hold stocks or invest in new businesses if they are not confident in how the market will react. This makes it harder for companies to raise money and has a negative impact on stock prices.
Reduction in Foreign Investment
When markets are healthy, they often receive a steady stream of outside investment. However, if international investors view a market as risky, they may withdraw their capital and place it in other regions with more stability. A lack of foreign investment can have negative impacts on the stock market.
If businesses are unable to turn a profit, whether it be due to demand problems, supply chain issues, inflation, or any other reason, this may cause a bear market. Having a large profit margin will give your business the cushion it needs to sustain itself through a bear market.
If investors view the market as unstable, it can lead to bear markets. Political events, natural disasters, government policies, and a host of other issues can lead to market instability.
Unemployment is one of the leading indicators of economic health. Bear markets are often associated with higher levels of unemployment, which can result in reduced demand and other economic issues.
Inflation, which refers to an overall rise in the price of goods and services, is another characteristic of bear markets. Governments aim to keep inflation low so that individuals have faith in their currency and can rely on prices. When inflation is high, businesses often lose money as the cost of expenses becomes unpredictable. When inflation soars, markets suffer.
Bear Market Phases
Generally, bear markets contain the following four phases:
- Bear markets typically start with extremely high stock prices – in some cases, this may be a bubble. In this stage, investor confidence might be extremely low.
- Next, the stock market crashes. The substantial price decreases cause businesses to reduce their economic output. Some investors panic and sell their shares, causing further price decreases.
- After the significant initial decreases in stock prices, investors may re-enter the market and purchase shares. Some investors may believe the drop in the market was only a short-term “dip.”
- Lastly, as the bear market continues, stock prices slowly fall. However, once the economy regains footing, the bear market transitions back into a bull market, and prices rise.
Cyclical vs. Secular Bear Markets
The primary difference between cyclical and secular bear markets is the length of time. With cyclical bear markets, the length of the bear run might be anywhere from a few weeks to multiple months. In fact, cyclical bear markets can happen during a long-term bull market.
However, secular bear markets typically run for multiple years. Some analysts describe secular bear markets to last anywhere between 10 to 20 years. The Great Depression lasted around a decade and would be considered a secular bear market. There might be short-term bull runs, and other market rises inside this secular bear market, but the overall trend will be negative.
Examples of Bear Markets Throughout History
There are many interesting examples of bear markets in modern history. Let’s look closer at some of the most famous bear markets in the United States’ recent past:
Great Depression, 1929-1939
The most famous example of a bear market is the Great Depression, which caused economic turmoil for around a decade from 1929 to 1939. This economic collapse resulted in a reduction in living standards around the world, and it began with a stock market crash that occurred over multiple days in October 1929. The initial crash wiped out millions of investors and the after-effects caused true damage to the economy. Rattled by the swift market losses, consumers reduced their spending, resulting in a slowdown in the overall economy. Years of economic ruin followed, and by 1931, more than six million Americans were unemployed.
While the Great Depression is often assessed as a single bear market, it actually consisted of a major crash and several bear markets (with some rallies in between). Regardless, the entire period offered unprecedented economic devastation.
This bear market started in 1969 and ended in 1970. At one point, the market had lost more than 35% of its value, and unemployment also soared to over 6% during this cycle.
The bear market that began in January 1973 is considered the longest continuous bear market in modern American history. In total, it lasted 630 days and resulted in the stock market losing more than 45% of its value.
The bear market that started in 2000 is a product of the famous “dot com bubble.” This bubble, which occurred after new tech companies saw exponential price rises, had a knock-on effect on other industries and markets. Not only did this result in a bear market that spanned multiple years, but it also created a recession in the United States economy.
“The Great Recession” occurred in 2007 and 2008 and led to a large stock market crash and a bear market that lasted over a year. This crash occurred because of the US housing bubble (subprime mortgage crisis). During this recession, the Dow Jones was down by more than 50%.
At the start of the COVID-19 outbreak, some markets dropped by more than 30% in the United States. However, despite the nation’s economy reaching a standstill and unemployment reaching double digits, the stock market rebounded after just over 30 days. This is largely thought to be due to the numerous stimulus programs initiated by the government and the Federal Reserve.
The “bear market 2022” is due to numerous economic factors linked to the COVID-19 crisis. Despite stock markets resurging after the collapse in 2020, the world economy now faces many unavoidable issues. Mounting debt, increasing inflation, and worldwide supply chain issues are all creating trouble for markets around the world.
How to Invest In a Bear Market
Investing in a bear market can be challenging even for experienced, professional investors. While there’s no doubt achieving returns is difficult in any setting, there are still a few strategies you can employ if you want to take advantage of a reduction in stock prices.
Note: Keep in mind this is not financial advice.
Hedge with bonds and dividend stocks
While tech has seen significant returns over the past decade, many technology companies are suffering during the latest bear market because of their lack of cash returns, as well as rising interest rates.
During recessions, many investors prefer businesses with strong cash flow. Therefore, looking at businesses that return dividends might be an option you want to explore. Businesses with long-term dividend track records are typically enterprises that focus on returning cash to investors.
Bonds are also an investment vehicle that many investors turn to during recessions. However, “junk bonds” can still leave you exposed to risky investments.
Focus on dollar-cost averaging
Choosing the bottom or top of a market is next to impossible. This means that investing large sums at given periods can expose you to unnecessary risk. You may think prices are low, but they can always go lower. Likewise, you may avoid investing at a suspected high price, only to find that the market climbs higher.
To combat these issues, you can use dollar-cost averaging. This process involves investing similar amounts at pre-determined intervals, regardless of the market’s current performance. This allows you to take advantage of dips and other low prices without needing to predict the market’s stability.
Diversify your portfolio
If you don’t want to invest in a single company, there are now ETFs, or exchange-traded funds, that invest in multiple companies in a given sector. By investing in an ETF, you can spread your money across multiple businesses to reduce overexposure to an individual business. There are now over 2,800 ETFs listed in the United States, so there are plenty of options to choose from.
Invest in recession-proof industries
If a market is starting to bear, investing in industries that perform well during recessions can help you reduce your losses. While all recessions are different, many investors place money into industries that provide products that consumers need, such as everyday essentials.
Stay focused on the long-term
However hard it may be, it’s critical to remain focused on the long-term. Most bear markets last less than a year, which means that panic selling your investments might be shortsighted. If you want to benefit from compounding growth, having a long-term mindset is the best approach.
Strategize with short sells, puts, and inverse ETFs
Many investors bet against the market by using “shorts” and inverse ETFs. While these strategies can yield huge results during economic downturns, they are not without their own risks. Short selling can expose investors to exponential losses. For example, hedge funds, including Melvin Capital, lost more than $19 billion combined during the Gamestop stock mania in January 2021.
While short selling has become popular with retail investors in recent years, this is not an investment strategy you should attempt without proper experience.
How to Retire In a Bear Market
Retiring during a bearish market can be scary. Seeing your hard-earned investments drop by more than 20% can be daunting for anyone but it’s especially stressful for individuals that no longer work. While there’s no set strategy for retiring in a bear market, there are a few tips that money experts suggest can help reduce your exposure to market declines.
- Keeping cash handy and out of the market avoids you needing to liquidate stocks at lower prices. Panic selling your shares results in huge losses and cash reduces the financial burden.
- Lowering your spending in the short term reduces your financial burdens. In turn, this will help you avoid selling stocks at lower prices.
- Reducing your debt will lower your exposure to high-interest rates. During economic turmoil, the Federal Reserve may set higher interest rates that increase your borrowing costs.
- Making sure you are not overexposed to a particular company or industry and diversification can help you avoid catastrophic losses.
This is not investment advice and speaking with an investment professional is often the best strategy if you need help retiring during a bear market.
What Does Bear Market Mean? Final Thoughts
Now that you understand the bear market meaning, it’s time to continue your investment research. Investing is challenging, and markets remain unpredictable, even for the most experienced investors in the world. Bear markets can be especially hard on business owners, that’s why fast business funding, investment strategy, and stock market knowledge can help cushion the aftermath of a recession.
Bear Market FAQs
Do you want to learn more about bear markets? If so, check out the common questions and answers below:
How long do bear markets last?
Predicting the length of a bear market is impossible. However, research suggests that bear markets traditionally last for fewer months than bull markets. On average, bear markets last around 9.6 months.
What causes a bear market?
Each bear market has unique characteristics. The cause of a bear market can be the result of economic policy, high-interest rates, low investor confidence, natural disasters, a host of other issues, or a combination of many. Even with 20/20 hindsight, it can be challenging for economists to agree on a bear market’s precise cause.
How bad is a bear market on the economy?
A bear market can cause investors to lose money in the market, lower employment rates, fewer tax receipts for governments, and other issues that result in worse consumer living standards.
When economies suffer, political turmoil and unrest can occur, leading to further instability worldwide.
How often do bear markets occur?
While the term bear market strikes fear into the hearts of many investors, there’s no doubt that this type of market cycle occurs frequently. In terms of S&P Dow Jones Indices, bear markets have occurred every 56 months since 1932. That’s an average of one bear market per four years and eight months.
How can I make money in a bear market?
Making money in a bearish market can be difficult, and there’s no set strategy for profiting from this type of market condition. However, many investors may short stocks, which allows them to benefit from a fall in share prices. This type of investment strategy is extremely risky and can result in significant financial losses, so inexperienced investors should not undertake it.
Instead, many investors diversify their portfolios to reduce exposure to specific industries in bear markets. Investors stay focused on long-term investments and attempt to invest by dollar-cost averaging, reducing exposure to sharp price changes.
Is there a way to tell when a bear market is coming?
If there were ways to predict when bear markets would arrive, then fund managers and other stakeholders would have much better returns. Unfortunately, bear markets sometimes arise due to unforeseen circumstances, such as the COVID-19 pandemic in 2020. However, keeping your eyes on the various characteristics outlined in this guide – such as lack of investor confidence, reduction in foreign investment, and high unemployment – can help you gauge whether a bear market might be possible.
What is a bear market rally?
A bear market rally refers to a short-term increase in stock prices that may occur during a bear market. This is also commonly called a “bull trap.” If a rally starts inside a bear stock market, it may cause investors to pile back into the market and lose money when the bear market continues.
What is the longest bear market on record?
The longest bear market in history, since 1928, was 21 months long between 1973 and 1974. While there were many bear markets that occurred during the Great Depression, these were broken up into multiple small bear market cycles.