DEFINITION
A Bear Market is when the broad market price falls at least 20% over a period of a few weeks from its most recent high.
The Key Takeaways
- A bear market is when the stock market as a whole drops by 20% in a short period of time.
- As the broad market is more likely to be in an increasing price state, bear markets are less common than bull markets.
- A loss of confidence among investors, businesses, and consumers is usually followed by a bear market.
- There are two kinds of bear markets: secular and cyclical.
Bear Market: Definition and examples
Stock prices can fall because of many factors, including economic conditions and interest rates. The Securities and Exchange Commission defines a “bear market” as a decline in broad market index of at least 20% over a period of two months. According the investment firm Invesco, a typical bear market lasts 363 days.
Although there have been several bear market periods in the history of the United States, it is generally more common for the economy to expand than contract. The market is more likely to be a bull or a bear. Because bear markets are less frequent than bull markets, their occurrences tend to be more publicized.
Here are some of the most notable bear market events in the U.S.
Great Depression Bear Market
The Great Depression bear markets was one of the worst in U.S. History. The Dow dropped 90% in less that four years. It peaked at 381 on Sept. 3, 1929 and fell to 41.22 on July 8, 1932. The 1929 stock market crash was the major event that triggered the bear. The 1929 stock market crash was the major event that led to this bear. It followed the popping of a financial asset bubble due to a financial invention known as “buying on Margin.” The “buying on margin” financial invention allowed investors to borrow money and pay only 10% to 20% down of their stock’s value.
Note:
Experts in the industry generally agree that there have only been 26 bear markets between 1929 and now. 4
Bear Market 2008
It began on October 9, 2007, when the Dow closed at 14,164.53. On March 9, 2009, it closed at 6,547.05. The bear market was caused by the 2008 stock market crash, failure of several financial and insurance institutions, and the reluctance of Congress to restore confidence through a bailout. 4 The Dow’s bear market began on October 9th, 2007, when it closed at 14,164.53. 5 By March 9, 2009, the Dow had closed at 6,547.05. It was the result of the 2008 stock-market crash, failures of financial and insurance companies, and Congress’ reluctance to pass a bailout. 6 This market didn’t end until 2009. It didn’t end until the government launched its economic stimulus plan of 2009.
1973 Bear Market
The 1973 bear market was the third worst in terms of percentage. The Dow closed at 1,051.70 on January 11, 1973. By December 4, 1974 the Dow fell to 598.40. 5 President Richard Nixon’s decision to end the gold-standard, followed by inflation, was one factor contributing to the bear market.
Bear Market 2000
The bear market of 2000 ended the largest bull market in U.S. History. It started on January 14, when the Dow closed 11,722.98. 5 From there, it fell 37.8% to its lowest point of 7,286.27 in October 2002. The 2001 recession was sparked by this bear market, and the 9/11 terrorist attacks that shut down stock markets around the world.
Bear Market 1970
The 1970 bear-market began on December 31st, 1968 when the Dow closed 943.75. The Dow fell more than 30% until it reached 631.16 in May 1970. 5
Bear Market 2020
5
Note:
The bear market of 2020, while painful financially, was relatively short-lived compared to bear markets in the past.
Bear Market 2022
8 9 By June 13, 2022 the Dow had reached 30,516.74, which is still 20% above its January high. 12
How does a bear market work?
Any asset class can experience a bear market. A bear market in stocks is usually measured by an index such as the Dow Jones Industrial Average, S&P 500 or NASDAQ Composite. Bonds can be affected by a bearish market, whether they are U.S. Treasuries or municipal bonds. Also, bear markets can occur in currencies, commodities such as oil, gold and municipal bonds.
A bear market can be caused by the loss of confidence among investors, businesses, and consumers. This is how it usually plays out.
The bear market begins
Bull markets are followed by bear markets. Bull markets can reach a point of irrational excitement among investors, which causes prices to soar too high. Investors begin to expect falling prices as a result of this overvaluation. Prices fall as investors begin to sell.
This loss of investor confidence can be caused by falling house prices, high rates of interest, economic conditions, natural disasters, or any other event that undermines positive investor sentiment.
Note:
Investors worry about bear market after a correction. This is less abrupt than a crash. Prices can drop by 10% in a few weeks or even months.
Bear Market Rallies
A Bear Market Rally occurs when the stock markets post gains for several days or weeks. Many investors can be fooled into believing that the stock market trend is reversing and a bull market has started. The stock market does not move in a straight line. These rallies are blips on an otherwise downward trend. It is not uncommon for a bear to have upward momentum that lasts several months or even days, only to turn back downward. 13
The bear market is over
A recession can be caused by a bear market if it affects the economy enough. The recession can last from a few months up to several years. However, the National Bureau of Economic Research will not consider the economy to be in a state of recession until it has met certain conditions, such as the extent and spread of financial losses and the length of the downturn.
Investor sentiment starts to increase when prices stop dropping and a bear market ends. Market prices start to climb as consumer and business confidence increases. A bull market starts when stocks rise 20% above their previous low.
Bear Markets: Types
Cyclical bear markets are regular bear markets where prices fall and then take several months or a year before they start to rise. Cyclical bear market tends to be shorter than a year or months.
Note:
Analysts and investors wonder if the bear market is cyclical, or secular. There’s no definitive answer, particularly when the market is in the midst of one of these shifts.
A secular bear markets lasts longer, and is driven more by long term trends than by short-term emotions. A secular bear market can have cyclical bear markets.
What it Means for Investors
Many investors will switch to a strategy that focuses on maintaining capital rather than growing it when a bear market occurs. Some investors may choose to invest in assets that have historically provided better returns than stocks, such as Treasuries or precious metals.
Reduce the risk in your portfolio to prepare for a Bear Market. You can, for example, increase your cash holdings and reduce the growth stocks in the portfolio. You can choose bonds or mutual fund that will perform better in a bearish market. For example, gold funds and funds focused on consumer staples and health care.
Individual bonds are more secure than bond funds during a bear market. The reason is that their interest rates are fixed. You will get the amount promised if you hold the bond to maturity, unless the issuing company defaults. The manager of bond funds may decide to sell or buy bonds before their maturity date, which could result in you losing money.
