A bear market is defined as a broad market decline of 20% or more from recent highs, which lasts for at least two months. Although bear markets make for dramatic headlines, the truth is that bull markets tend to last much longer — the average bear market typically ends within a year.
While most investors know the difference between a bull and a bear market, it’s important to know some of the characteristics of bear markets in order to understand how different market conditions may impact your portfolio and your investment choices.
What Is a Bear Market?
When the broader stock market declines for at least two months straight, showing a loss of 20% or more for that period, that’s when the bears are out. But while a bear market typically generates unease among investors, bear market conditions only last about eight to 10 months on average — and it can take another 12 to 24 months to regain lost ground.
By contrast, bull markets tend to last for years; the most recent bull market, prior to the Covid pandemic, lasted about 11 years. The Dow Jones Industrial Average entered a bear market in March of 2020.
Generally the market drop is measured using the performance of the S&P 500 as a benchmark for the entire stock market. The first and most famous bear market was the Great Depression. Other bear markets include the dot-com crash of 2000 and the housing crisis in 2007-2008. However, there can actually be a bear market for any particular stock, index, or other asset such as gold or various types of cryptocurrencies; the term doesn’t just refer to the overall market. For instance, if the stock of a company fell 20% for more than two months, one would say that company’s stock is in bear market territory.
The term stock market correction is often used interchangeably with the term bear market, but they are different performance indicators. A stock market correction is when stocks decrease 10% or more from their recent high. If the decrease continues to 20% then it becomes a bear market.
Why Is It Called a Bear Market?
There are a variety of explanations for why “bear” and “bull” have come to describe specific market conditions. Some say a market slump is like a bear going into hibernation, versus a bull market that keeps charging upward.
The origins of the term bear market may also have come from the so-called bearskin market in the 18th century or earlier. There was a proverb that said it is unwise to sell a bear’s skin before one has caught the bear. Over time the term bearskin, and then bear, became used to describe the selling of assets.
Characteristics of a Bear Market
There are two different types of bear markets:
• Regular bear market or cyclical bear market: The market declines and takes a few months to a year to recover.
• Secular bear market: This type of bear market lasts longer and is driven more by long-term market trends than short-term consumer sentiment. A cyclical bear market can happen within a secular bear market.
What Causes a Bear Market?
Usually bear markets are caused by a loss of consumer, investor, and business confidence. Various factors can contribute to the loss of consumer confidence, such as changes to interest rates, global events, falling housing prices, or changes in the economy.
When the market reaches a high, people may feel that certain assets are overvalued. In that instance, people are less likely to buy those assets and more likely to start selling them, which can make prices fall.
When other investors see that prices are falling, they may anticipate that the market has reached a peak and will start declining, so they may also sell off their assets to try and profit on them before the decline. In some cases panic can set in, leading to a mass sell-off and a stock market crash (but this is rare).
Is a Recession the Same as a Bear Market?
No. Bear market conditions can lead to recessions if the market slump lasts long enough. But this isn’t always the case. According to the National Bureau of Economic Research as reported in The New York Times, the U.S. has been in a recession only 14% of the time since World War II.
What Is a Bear Market Rally
Things can get tricky if there is a bear market rally. This happens when the market goes back up for a number of days or weeks, but the rise is only temporary. Investors may think that the market decline has ended and start buying, but it may in fact continue to decline after the rally. Sometimes the market does recover and go back into a bull market, but this is hard to predict.
If the bear market continues on long enough then it becomes a recession, which can go on for months or years. That said, it’s not always the case that a bear market means there will be a recession.
Once asset prices have decreased as much as they possibly can, consumer confidence begins to rise again, and people start buying. This reverses the bear market trend into a bull market, and the market starts to recover and grow again.
Example of a Bear Market
The most recent bear market occurred in June of 2022, when the S&P 500 closed 21.8% lower than its high on Jan. 3, 2022.
While the Nasdaq and the Dow showed a similar pattern in early 2022, the decline of those markets didn’t cross the 20% mark that signals official bear market territory.
Bear Market vs Bull Market
A bull market is essentially the opposite of a bear market. As consumer confidence increases, money goes into the markets and they go up.
A bull market is defined as a 20% rise from the low that the market hit in a bear market. However, the parameters of a bull market are not as clearly defined as they are for a bear market. Once the bottom of the bear market has been reached, people generally feel that a bull market has started.
Investing Tips During a Bear Market
There are a few different bear market investing strategies one can use to both prepare for a bear market and navigate through one.
1. Reduce Risky Investments
When preparing for a bear market, it’s a good idea to reduce riskier holdings such as growth stocks and speculative assets. One can move money into cash, gold, bonds, or other ‘safe’ investments to reduce the risk of losses if the market goes down.
These safe investments tend to perform better than stocks during a bear market. Types of stocks that tend to weather bear markets well include consumer staples and healthcare companies.
2. Diversify
Another investing strategy is diversification. Rather than having all of one’s money in stocks, distribute your investments across asset classes, e.g. precious metals, bonds, crypto, real estate, or other types of investments.
This way, if one type of asset goes down a lot, the others might not go down as much. Similarly, one asset may increase a lot in value, but it’s hard to predict which one, so diversifying increases the chances that one will be exposed to the upward trend, and you’ll see a gain.
3. Save Capital and Reduce Losses
During a bear market, a common strategy is to shift from growing capital into saving it and reducing losses. It may be tempting to try and pick where the market has hit the bottom and start buying growth assets again, but this is very hard to do. It’s safer to invest small amounts of money over time using a dollar-cost averaging strategy so that one’s investments all average out, rather than trying to predict market highs and lows.
4. Find Opportunities for Future Growth
However, in a broad sense if the market is at a high and assets are clearly overvalued, this may not be the best time to buy. And vice versa if assets are clearly undervalued it may be a good time to buy and grow one’s portfolio. A bear market can be a good time to identify assets that might grow in the next bull market and start investing in them.
5. Short Selling
A very risky strategy that some investors take is short selling in anticipation of a bear market. This involves borrowing shares and selling them, then hoping to buy them back at a lower price. It’s risky because there is no guarantee that the price of the shares will fall, and since the shares are borrowed, typically using a margin account, they may end up owing the broker money if their trade doesn’t work out as they hope.
Overall, it’s best to create a long-term investing strategy rather than focusing on short-term trends and making reactive decisions to market changes. It can be scary to watch one’s portfolio go down, especially if it happens fast, but selling off assets because the market is crashing generally doesn’t turn out well for investors.
The Takeaway
Bear markets can be scary times for investors, but even a prolonged drop of 20% or more isn’t likely to last more than a few months, according to historical data. In some cases, bear markets present opportunities to buy stocks at a discount (meaning, when prices are low), in the hope they might rise.
Also there are strategies you can use to reduce losses and prepare for the next bull market, including different types of asset allocation. The point is that whether the markets are considered bearish or bullish, any time can be a good time to invest.
If you’re looking to build a portfolio, no matter what the market, it’s easy when you set up an Active Invest account with SoFi Invest. The secure investing app lets you research, track, buy and sell stocks, ETFs, crypto, and other assets right from your phone or computer. You can easily move between different types of assets and you can set automated recurring investments if you want to put in a certain dollar amount each week or month. All you need is a few dollars to get started.
FAQ
How long do bear markets last?
Bear markets may last a few months to a year or more, but most bear markets end within a year’s time. If they go on longer than that they typically become recessions. And while a bear market can end in a few months, it can take longer for the market to regain lost ground.
When was the last bear market?
The most recent bear market started in June of 2022, when the S&P 500 fell from record highs in January for more than two months.
Photo credit: iStock/Morsa Images
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