Definition of a Bear Market
In financial markets, a bear market is a sustained period of falling prices. This is typically defined as a decline of at least 20% from recent highs.
The term is often used to refer to the stock market, but can also apply to other markets, such as the bond market or the real estate market. Bear markets can be caused by a variety of factors, including concerns about the economy, political unrest, or natural disasters. They are usually accompanied by widespread pessimism and investor fear.
Key Takeaways
- A bear market is defined as a decline of at least 20% from the peak of the market
- Bear markets might last anywhere from a few months to several years and they are a normal part of the investing cycle
- Taking a disciplined investing approach during a bear market can make sure you are still on track to reach your long-term financial goals
The Bear Market of 2022
The S&P 500, a broad measure of the US stock market, entered a bear market on June 8th, 2022, after falling more than 20% from its recent high. This marks the first time the index has been in a bear market since March 2020, when it began a steep decline in the wake of the Covid-19 pandemic.
The recent sell-off appears to be driven by concerns about inflation and interest rates, as well as worries about the pace of economic recovery. While the S&P 500 has recovered much of its losses since then, it has struggled to regain its 2021 highs.
How Long Do Bear Markets Last?
It is difficult to predict the length of a bear market. They can last for months or even years, and the severity of the market decline will vary depending on the underlying cause. For example, the bear market that began in 2007 was caused by a housing bubble and lasted for more than two years. In contrast, the bear market of 2000-2002 was triggered by a dot-com bubble and lasted only about 16 months.
Interestingly, the longest bear market in U.S. history lasted for more than three years. That bear market began in 1929 and didn't end until 1932. During that time, the stock market declined by 86%. Of course, that bear market was precipitated by the Great Depression, which was one of the worst economic crises in American history.
Ultimately, the length and severity of a bear market are impossible to predict ahead of time.
Effects of Bear Markets
When the stock market is in a bear market, it can have a ripple effect on the rest of the economy. For example, businesses may cut back on investment and consumer spending may decline. This can lead to layoffs and increased unemployment. In extreme cases, a bear market can lead to a recession.
Over the long term, bear markets are typically followed by bull markets, which are periods of rising prices. As such, bear markets should be viewed as a natural and healthy part of the investment cycle.
Do Bear Markets Always Coincide With Recessions?
A bear market is defined as a drop in the value of assets such as stocks and bonds by at least 20%. A recession, on the other hand, is a significant decline in economic activity lasting more than a few months. While bear markets often coincide with recessions, there have been several instances where this has not been the case.
For example, the period between 2002 and 2003 saw a bear market, but there was no recession. Conversely, there was a recession in 2001 even though there was no bear market. This shows that while the two events are often closely linked, they are not always directly connected.
Investing During a Bear Market
Many investors are cautious about investing during a bear market when stock prices are falling. However, prudent investing can help you navigate the bear market.
One way to invest during a bear market is to use a strategy known as Dollar Cost Averaging. Dollar Cost Averaging is a strategy where an investor buys a fixed dollar amount of a particular asset on a regular schedule, regardless of the asset's price. The goal is to reduce the effects of bear market volatility on the overall purchase price while still benefiting from long-term price appreciation. For example, an investor might choose to invest $500 in a stock every month for 12 months. By buying shares at different prices over time, the investor will ultimately pay an average price that is generally lower than the stock's long-term price. While averaging does not guarantee profits, it can help to reduce losses when markets are volatile.
Diversification of your portfolio is key when it comes to investing during a bear market. By investing in a variety of different companies and industries, you can protect yourself from the potential downside of any one investment. For example, growth stocks tend to be more volatile, and your portfolio would not be as seriously impacted if you had also invested in value stocks. There are several ways to diversify your stock portfolio. One option is to invest in mutual funds, which allow you to pool your money with other investors and spread your risk across a wide range of investments. Another option is to invest in exchange-traded funds (ETFs), which are like mutual funds but are traded on stock exchanges.
Bear markets are a normal part of the investing cycle, and they can test even the most experienced investor. While these periods are difficult to endure, history shows that bear markets do not last forever and that the market will eventually recover. If you are investing for a long-term goal, such as retirement, it is important to remember that the bear markets you experience will be outweighed by the bull markets.
Bear Market vs Bull Market
A bear market is typically characterized by falling prices and a general sense of pessimism, while a bull market is characterized by rising prices and optimism.
Bull markets are usually driven by strong economic growth, rising corporate profits, and optimistic investor sentiment. Bull markets typically last for several years, and during this time, investors can see significant gains in their portfolios. However, bull markets eventually come to an end, and when they do, they are often followed by bear markets, where prices decline.
Bear Market vs Market Correction
While a bear market signifies a sustained decrease in stock prices, a market correction is a shorter-term event that sees prices drop sharply, typically by 10% or more.
A market correction is a shorter-term event and is a normal part of the market cycle. Bear markets usually happen when the economy is weak, and investors are worried about the future. Corrections tend to happen when there's been a run-up in prices and investors are worried about valuations.
Corrections are relatively common and happen about once every three years on average. However, corrections usually don't last long and typically end within a few months.
