Analysts define a bear market as a prolonged period in which investment prices plunge by at least 20% from their historical average. A market must drop by 20% or more from its most recent high for analysts to consider it a bear market and it remains bearish until it soars by 20% from its lowest level again. Some economists refer to it as a recession or depression.
However, in the stock market, this term usually refers to a downward move, especially when it comes to one of the major indexes, such as the Dow Jones Industrial Average, the tech-oriented Nasdaq or the S&P 500. Still, we can apply it to any other asset that tumbles down for an appreciable amount of time.
Economists and etymologists are debating about how bear markets got their name. The most likely possibility is that it arose from an old proverb saying it’s bad to sell the bear’s skin before one has caught the bear. The meaning is that you can’t unload something you didn’t actually own and trying to do that anyway is unwise. Nowadays, “bears” are a slang term for speculators claiming that share prices are going to drop.
A bull market opposes a bear market. It is a buoyant period of surging prices. You can easily keep them straight just by envisioning the two animals’ characteristic behaviour: a charging bull (a rallying market) and a hibernating bear (a dropping or sluggish market).
Also, bull market is characterized by rising prices and a general sense of optimism and confidence in the market, while a bear market is characterized by falling prices and a sense of pessimism and uncertainty. In a bull market, investors are more willing to take risks, while in a bear market, they tend to be more cautious.
Are the bear markets the same as corrections?
No, bear markets and corrections are not the same thing. While both terms refer to declines in the value of the stock market or other financial assets, they have different meanings and implications. The later is a drop of more than 10% but less than 20%. The Schwab Center for Financial Research reported that while the 22 corrections occurred between November 1974 and early 2020, only four of them progressed into actual bear territory. And those four occurred in 1980, 1987, 2000, and 2007.
Corrections can occur due to a variety of factors, including investor sentiment, economic data releases, or changes in government policy. Corrections are usually followed by a rebound in market prices, and they can be a buying opportunity for investors looking to add to their positions.
On the other hand, recessions are more severe and prolonged declines in the value of the market or asset, typically defined as a decline of 20% or more. Bear markets can last for months or even years, and they can be triggered by a variety of factors, including economic recessions, political instability, or changes in interest rates. Bear markets can cause significant losses for investors, and they can be challenging to navigate.
In summary, corrections and bear markets are both declines in the value of financial assets, but they differ in their severity, duration, and implications for investors. Corrections are typically shorter-term and seen as normal market cycles, while bear markets are more severe and can be more challenging to navigate.
What are key traits?
Economic downturn often triggers bear markets. Besides, negative events or news can also cause stocks to tumble down. Here are the main characteristics of a bear market:
Traders turn pessimistic and decide to either sell current investments, stop buying more or both. However, such actions increase the supply of available shares, depressing prices.
Stock values plummet. It often causes listed companies to become worth less on paper due to their lower stock prices.
Traders’ sentiment turns negative, resulting in the market to stop growing. In such cases, investors prefer to move money to safer and steadier assets, like investment-grade bonds or Treasury bills.
Companies earn less money. When consumers are buying less, businessmen often lose confidence. As a result, corporate earnings and profits drop or stagnate. The firms lay people off and cut production, simultaneously curbing research and development.
How long do they usually last?
Bear markets can vary in length and severity, and there is no fixed duration for them. Generally, bear markets are defined as a decline of 20% or more in a particular market index, such as the S&P 500, from its recent high. The length of a this decline depends on various factors, including the severity of the underlying economic conditions, the magnitude of the decline, and the policy responses of governments and central banks.
Historically, bear markets have lasted anywhere from several months to several years. For example, the bear market of 2008-2009 lasted for about 17 months, while the depression of 2000-2002 lasted for about 31 months. However, there have been instances where recession have been relatively short-lived, lasting only a few months.
It’s important to note that while bear markets can be painful and challenging for investors, they are a normal part of the market cycle. Over the long term, markets have tended to recover from bear markets and have gone on to produce positive returns for patient investors.
Real-world examples of depression:
- The Great Recession of 2008-2009: The global financial crisis triggered a severe bear market in stocks, with the S&P 500 falling more than 50% from its peak in 2007 to its low in March 2009.
- The Dotcom Bubble of 2000-2002: The dotcom bubble burst in 2000, leading to a bear market in stocks that lasted for more than two years.
- The Oil Crisis of 2014-2016: A glut of oil on the market led to a decline in oil prices, triggering a bear market in energy stocks and commodities.
- The Asian Financial Crisis of 1997: A series of currency devaluations and financial market crashes in Asian countries triggered a bear market in emerging market stocks.
- The COVID-19 Pandemic of 2020: The COVID-19 pandemic led to a global economic slowdown and a bear market in stocks, with major indices like the S&P 500 falling more than 30% in just a few weeks.
