- A bear market occurs when there’s been a significant, continuous fall in stocks or another asset, usually at least 20%.
- Bear markets generally indicate low investor confidence and a sluggish economy.
- Despite their negative reputation, bear markets can offer good buying opportunities for patient investors.
To the average investor, a bear market can be as terrifying as a seven-foot-tall grizzly. Bear markets can lay bare the vulnerabilities in your investment portfolio and exacerbate them. This sustained decline in the stock market is also often the bearer of bad news: an upcoming
Even if these markets are usually bad news bears, downward trends in the stock market are a natural part of the ebb and flow of the financial markets. However, it is easy to get caught up in the panic and lose your bearings.
What is a bear market?
A bear market is defined as a prolonged period in which investment prices plummet at least 20% or more from their most recent high.
The term usually refers to a downward move in the stock market — specifically, one of the major indexes: the Dow Jones Industrial Average, the S&P 500, or the tech-oriented Nasdaq. However, it can also be applied to any other asset that slumps for an appreciable amount of time.
Economists and etymologists alike love to debate how bear markets got their name, but it most likely arose from an old proverb about how it’s bad “to sell the bear’s skin before one has caught the bear,” meaning to unload something you didn’t actually own. From there, “bears” came to be a slang term for speculators betting that prices were going to drop.
The opposite of a bear market is a bull market, a buoyant period of rising prices. You can keep them straight by envisioning the two animals’ characteristic behavior: a hibernating bear (a sinking or sluggish market) and a charging bull (a surging market).
What causes a bear market?
A bear market happens when an inciting incident, whatever it may be, undermines investor confidence, causing them to sell their shares, which lowers stock market prices. The momentum of a bear market can often perpetuate itself. As prices drop, investors lose confidence, which prompts them to sell. This further drives the stock market’s decline.
Are we in a bear market?
As of mid-June 2022, both the S&P 500 and the Nasdaq have dipped into bear market territory, a result of an expected recession coming in 2023, the ongoing war in Ukraine, and continued uncertainty from the pandemic. The Dow Jones Industrial Average has yet to drop below that 20% threshold but teeters on the edge.
The bear market marks the end of the economic recovery period that followed the two-month recession as a result of COVID-19. This is the second bear market since the beginning of the pandemic when the S&P 500 saw a 34% drop in the stock market over the course of a month between February and March of 2020.
Bear market vs. corrections
Bear markets shouldn’t be confused with corrections, which are drops of more than 10% but less than 20% in the stock market. According to the Schwab Center for Financial Research, of the 22 corrections that occurred between November 1974 and early 2020, only four progressed into actual bear territory. Those occurred in 1980, 1987, 2000, and 2007.
Bear market vs. recession
Bear markets shouldn’t be confused with recessions, either. Recessions are officially announced by the National Bureau of Economic Research (NBER) but are generally defined as a drop in gross domestic product (GDP) for at least two quarters. Although the two often move in tandem, it’s possible, though rare, to have a bear market without a recession, and vice versa.
A bear market has only happened without an associated recession once, during the stock market crash of 1987. Also known as Black Monday, the Dow Jones dropped 22.6%. However, the crash was short-lived. Within two trading sessions, the Dow had recovered 57% of its Black Monday losses.
Key traits of a bear market
However, bear markets are often triggered by an economic downturn — a contraction phase in the business cycle. Negative news or events can also cause stocks to change course.
The main characteristics of a bear market include:
- Investors turn pessimistic. They decide to sell current investments or stop buying more. This increases the supply of available shares, depressing prices. Investors also usually move money toward steadier assets like Treasury bills and investment-grade bonds.
- Stock values decline. Stock prices dip below their company’s book value. Companies also lose money because consumers are buying less. This can lead to rising unemployment as companies freeze hiring and start laying people off as they slow production.
- Investor sentiment turns negative. The consensus is that the market’s stopped growing and won’t appreciate anytime soon. Investors move money to safer and steadier assets, like Treasury bills and investment-grade bonds.
- Companies make less money. Consumers are buying less, and investors have lost confidence. Corporate earnings and profits fall or stagnate. This leads to firms laying people off, cutting production, and curbing research and development.
- The economic malaise spreads. Money becomes more tight, leading to the risk of deflation. Markets, production, and spending are moribund.
- A turnaround occurs. Conditions bottom out. Lower interest rates stimulate spending and borrowing again. As activity and confidence return, stocks rebound and the market begins a bull run and a period of economic growth.
How long do bear markets last?
Bear markets can last for any length of time, though the average bear market lasts 9.6 months, compared to the average
, which lasts 3.8 years. Investors distinguish between “cyclical” and “secular” bear markets, which differ in their time frame. Cyclical bears tend to be short-term, lasting a few months. Bears that are “secular” can endure from five to 25 years.
Secular bears aren’t one long slide downward, either: During “bear market rallies,” for instance, stock prices rise for a time before plunging again, to new lows.
Because the low point can only be figured out retroactively, after the market’s definitely on the rebound, there’s always a lag before you can declare a bear market definitely over. (Bull markets have the same issue.)
While recessions and bear markets often go hand-in-hand, recessions end once the economy starts bouncing back while bear markets end once the market has increased 20% above its lowest point. This means that a bear market will usually, by definition, exceed the actual recessionary period that caused the bear market.
4 ways to invest during a bear market
Bear markets are bad news to most investors since it’s more difficult to get a return on your investments. Theoretically, you could short-sell stocks to capture the market’s downward trend, but that adds a large amount of risk to your portfolio.
During a bear market, goals tend to shift from making money to retaining the money you’ve already put in the market, which will often take the form of a waiting game. “It’s not a loss until you sell” is especially true in a bear market, but that’s often a painful truth. While bear markets generally have a shorter lifespan than bull markets, the average bear market lasts 9.6 months, which isn’t an amount of time to shrug at.
Here are a few other time-tested ways to weather a bear market:
1. Dollar-cost average selling
If you want or need to liquidate your stocks, it may be tempting to do it all at once. However, it may be worth your time to consider dollar-cost averaging instead. Usually applied to buying, dollar-cost averaging typically has you investing a set amount of money into a certain stock over a period of time instead of buying all at once. The idea is that spreading out your investments over a period of time will smooth out momentary spikes in any direction, meaning your cost basis will more closely follow the overall market trend.
2. Stick to the staples
While some companies might reign in production during an economic downturn, there are some companies that produce goods and services that people need, regardless of the current economic conditions. These industries — such as the food or utility industries — often hold their value if they aren’t increasing in value.
3. Try value investing
Bear markets are good for bargain-hunting. Fundamentally sound companies may be temporarily depressed, their shares slashed by the bear’s claws. As stock prices continue to fall, they can fall below the actual valuation, the book value, of the company. An investment strategy that focuses on these bargain stocks is known as value investing. Once the market returns to its original point and these undervalued stocks more accurately reflect their company’s book value, you’ll be able to capture that increase.
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4. Don’t get carried away
It can be easy to end up with overly risky investments when you’re in the middle of a bear market, looking under every rock for investments with big payoffs — you hope. Pay close attention to risk, and make sure you understand what you are investing in.
The bottom line
Hardly anyone is happy when the bears show up on Wall Street, but they are an inescapable fact of the financial landscape. Although they can cause pain, they can also induce a necessary cooling-off period for the stock market. And they help distinguish truly valuable investments from those that were overly inflated when the bulls were in charge.
John Rambow is a freelance writer, editor, and community manager. He’s written for publications that include Budget Travel, Fox News, Fodor’s, and New York and BlackBook magazines. He’s edited for Fodor’s and Moon guides, and also helped copyedit the website of one of the largest law firms in the world. He was previously an executive editor at Budget Travel, where he oversaw its website’s homepage as well as its blog, e-newsletter, and all web-only content. Previously he was the editor for Gridskipper, Gawker Media’s travel blog. During a two-year stint in India, he updated portions of the Fodor’s guide to India and blogged for Jaunted as well as Gridskipper. As an in-house editor at Fodor’s, he created and was the editor of its blog — one of the first to be devoted to travel news. Xeni Jardin of Boing Boing called it “kickass.”
Paul Kim is a Personal Finance fellow at Insider where he writes explainers and how tos that help readers understand how to better manage their money. A recent NYU graduate, Paul has spent the majority of his journalism career at his student-run newspaper Washington Square News, where he wore a number of hats. Most recently, he helped rebuild the newspaper in the spring of 2021 as its managing editor after nearly all the staff resigned the previous semester over issues of editorial independence.When he’s not writing, Paul loves cooking and eating. He hates cilantro.
Direct tips to firstname.lastname@example.org and family recipes to @PaulKimWrites on Twitter.
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