Table of Contents:
- History of Bear Markets
- What Causes a Bear Market?
- Different Types of Bear Markets
- What are ‘Bearish’ Stocks?
- Phases of a Bear Market
- Tips for Investing in a Bear Market
- Bear Markets & Crypto
- The Bottom Line
Investing, like anything worthwhile, takes time to understand. The good news is that there’s plenty of information readily available, so you’ll be able to learn whatever you need as your experience grows.
As an investor, you’ve most likely come across some interesting terms. After all, investing has a lot of them! You may have already heard the term bear market, which goes hand in hand with another term you’ll become familiar with known as a bull market.
Bear Market Definition
So, what is a bear market? Simply put, a bear market is when the stock market undergoes a decline over a prolonged period of time which can be defined as two months or more. Bear markets definition’ also adds that it’s a decline of 20% or more from the most recent high. Bear markets can be in conjunction with a general economic downturn like a recession.
Although they are typically associated with the stock market or the S&P 500 index, bear markets can also apply to individual securities.
What does this mean in terms of your investments? It can be a frightening time for investors but also a time of opportunity. With an event like this, many investors will sell low, thinking that something is better than nothing. Still, if you can keep your cool and think strategically and buy when prices dip, it can put you ahead, so when the market normalizes, you may see even bigger returns.
- Knowing the history of bear markets can offer insights into how long bear markets last and why they can happen in the first place.
- Learning the phases of a bear market helps investors to know what’s coming and plan appropriately.
- Learn these tips for investing so you can minimize losses and come out ahead with even more significant gains.
History of Bear Markets
You may think of a bear market as some catastrophic event, and honestly, many of them were. But what if we told you that we were in one as recently as one year ago. Would that surprise you?
On March 11, 2020, for the first time in eleven years, the Dow Jones Industrial Average (DJIA) plummeted from 30,000 to just 19,000, with NASDAQ and the S&P 500 following days later due to concerns over the Covid-19 pandemic.
It didn’t take long for things to spring back as news of a vaccine spread and the global economy rebounded, proving that even in a healthy economy, it is possible for an event to put us in a bear market. The 2020 bear market may have been the latest one, but if you take a look at history, you’ll find that there have been a total of 14 bear markets between 1947 and 2021 that varied in length from 1 month to 1.7 years. Some of the worst ones include:
- The crash of 1929, which began when investors panicked, sending the DJIA crashing by 11 % due to public utility holding company’s bad business practices. But in the decade before, there was an exponential growth of over 400%.
- The great depression, which was from 1929 to 1941 and was fueled by a number of economic events, including the crash of 1929. It has been cited as one of the most significant catastrophic events of the 20th century.
- From 2007 – 2009, with a slipping economy, home loans were given to borrowers who couldn’t afford them, causing a financial crisis. During this time, the federal government had to intervene to save systemically important financial institutions (SIFI) known to us as banks, insurance companies, and other financial institutions from collapsing, despite the general consensus that those financial institutions are too big to fail.
These are just a few examples of bear markets and how market crashes, despite how devastating they are, bounce back even stronger with time.
Why is it Called a Bear Market?
There are a few explanations for the terms bear and bull markets that refer to each animal’s strength. Although it’s a little unclear exactly where they came from, one explanation is that the term bear market stems from how a bear attacks, using a swipe down motion. It’s used as a metaphor for when the market drops. The bull uses its horns, swiping in an upward motion —the metaphor for a rising market.
Both terms bull and bear can be used to describe the actions of the market rising or falling in a general sense and resemble the sentiment of investors. When you hear an investor referring to a bear market, they are talking about a decline in the price of either a specific stock or the market in general.
How Long Do Bear Markets Last?
Bear markets are a normal part of the investing cycle and understanding that can help you to make smart decisions when you experience one. But you may be wondering, how long does a bear market last anyway?
As already stated, bear markets vary in time and depend on several factors, but generally, they don’t tend to last long. It is important to consider the two phases of a bear market. One is how long it takes to fall from the high and another is the time it takes to recover from the low. On average, a bear market might last about three years in total, with the recovery period being about two years. Looking at the past performance of two bear markets can show you the difference.
- The shortest bear market was in February of 2020, when there was a 34% drop in the S&P 500 due to the Covid 19 pandemic. It lasted 2 months.
- The longest bear market was the Great Depression from March of 1937 to April of 1942, lasting just over 5 years.
What Causes a Bear Market?
When investing, it’s important to look at an overall long-term view and understand that there are a variety of circumstances that can alter expectations. The important thing isn’t the events but how you decide to look at them that can make a difference.
The volatile nature of the stock market means that preparation is key and strategic thinking can take an unexpected situation and use it to your benefit.
Causes of bear markets can include;
- A slowing economy. Any number of factors include economic shifts, interest rates, political crises, pandemics, and military actions.
- A weakening economy. Things like unemployment, low productivity, business closings, low disposable income, and government interventions.
- Taxes. Changes in tax rates or the federal funds rate.
- Attitudes. Confidence in the financial stability of the market can cause investors to take action to avoid losses.
Are We In a Bear Market?
The last bear market on record occurred in 2020 with the Coronavirus outbreak. Since then, the S&P 500 has experienced more than fifty new highs, which signifies that we are not in a bear market in 2021, but a very strong bull market.
Different Types of Bear Markets
One thing to note when it comes to a bear stock market is that there are two types which include cyclical and secular, each producing varying types of declines.
- A cyclical bear market is shorter with regular seasonal fluctuations that move with economic activity, such as consumer spending and financial growth.
- A secular bear market is a long-term event caused by situations that affect stagnation within corporate earnings. They are tied to investor pessimism in a positive feedback loop.
Although some can confuse what is meant by a bear market vs. a stock market correction, you should understand they are different. A correction happens when a stock dips 10% or more from a recent high and becomes a bear market only when it hits the 20% mark.
What Are ‘Bearish’ Stocks?
What does bearish mean? It refers to the expectation that the stock market will fall over a period of time. It can refer to the stock market as a whole, or individual stocks and may be expressed by widespread investor cynicism about the future of the market and hasty reactions in trading.
Phases of a Bear Market
Bear markets happen in 4 phases, and despite experience, you may not actually see it coming until it’s upon you.
- The first phase is defined by high stock prices and high investor confidence, as overall consensus about the market is positive.
- Phase two is when stock prices fall, and trading begins to drop as investors realize what’s happening and attitudes change. It’s referred to as capitulation and is when some investors may begin to panic.
- Phase three is when the risk-takers, called speculators, come into the market and raise some prices, anticipating future increases in hopes of seeing gains that offset their risks.
- Phase 4 is when the price of stock continues to drop but at a slower pace, as investors come back and market confidence is restored, leading to a bull market.
Tips For Investing in a Bear Market
As an investor, you will experience bear markets because the reality is that they come with the territory as a regular part of stock market cycles. However, knowing they will come doesn’t mean you’ll know when they will show up, how long they might last, or how significantly stock prices will be affected.
The good news is that you’ll not only be able to survive them, but you can actually benefit from them with the right investment strategy. These tips can help you to learn how to invest in stocks and reduce losses and look for ways to gain from bear markets.
- Avoid quick reactions. Yes, it can be unnerving when you see the market spiraling downward, but jumping out and selling when the market is low, can impact your overall capital and miss major rallies as the stock market normalizes in the early stages of recovery.
- Evaluate goals and risk tolerance. When times are good, it can be easy to forget the long-term goals you’ve set for yourself, and there’s nothing like a bear market to jolt you into reality about your risk tolerance. Take time to understand what type of investor you are so when the time comes, you can update and make changes that fit your investment style.
- Don’t stop regular investments. Hopefully, you’re investing on autopilot already where you’re making regular contributions to your portfolio, which is called dollar-cost-averaging. It’s a systematic technique that can minimize loss when the market dips.
- Think strategically. When the market is in a downturn, there can be opportunities to purchase stocks at lower prices, so when the market recovers, you can see higher market gains and continue to diversify with stocks that are vital in society, such as utilities, healthcare, and other vital businesses.
- Keep a perspective. History is evidence that when it comes to investments, whatever goes down will also bounce back and sometimes even better than before. If you can remain calm and think strategically, you can take the natural fluctuations and use them for your own benefit.
- Continue to diversify. Having a diversified portfolio is one of the best things you can do in order to plan for the future and meet your financial goals. Think exchange-traded funds (ETFs), bonds, and stocks for a well-balanced portfolio.
Bear Markets & Crypto
Like a bear market affecting the stock market, a crypto bear market is where the value of the major cryptocurrencies such as the popular Bitcoin has fallen by at least 20% from the most recent high. Since crypto is fairly new, there isn’t the history behind it to show concrete results, but we do understand that like stocks, there are outside factors that can affect the market.
The Bottom Line
Bear markets are a regular part of the investment cycle and shouldn’t be feared, but knowing how to handle them can help you to manage losses, and if you allow yourself to think strategically, you may even come out better off.
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