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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 might 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 the Definition of a Bear Market?

Investors and market watchers generally define a bear market as a drop of 20% or more from market highs. So, when investors refer to a bear market, it usually means that multiple broad market indexes, such as the S&P 500 Index (S&P 500), Dow Jones Industrial Average (DJIA), and others, fell by 20% or more over at least two months.

Note, though, that 20% is a somewhat arbitrary barometer, but it’s a common enough standard throughout the financial world.

The term bear market can also be used to describe a specific security. For example, when a particular stock drops 20% in a short time, it can be said that the stock has entered a bear market. Bear markets are the opposite of bull markets, the latter of which is when the market is seeing a broad increase in asset values.

Bear markets are often associated with economic recessions, although this isn’t always the case. As economic activity slows, people lose jobs, consumer spending falls, and business earnings decline. As a result, many companies may see their share prices tumble or stagnate as investors pull back.

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.

History of Bear Markets

The most recent U.S. bear market began in June 2022, largely sparked by rising interest rates and inflation. The bear market officially ended on June 8, 2023, lasting about 248 trading days, resulting in a market drop of around 25%.

Including the most recent bear market, the S&P 500 Index posted 13 declines of more than 20% since World War II. The table below shows the S&P 500’s returns from the highest point to the lowest point in a downturn. Bear markets average a decline of 32.4%, and generally last around 355 days.

Bear markets have occurred as close together as two years and as far apart as nearly 12 years. A secular bear market refers to a longer period of lower-than-average returns; this could last 10 years or more. A secular bear market may include minor rallies, but these don’t take hold.

A cyclical bear market is more likely to last a few weeks to a few months and is more a function of market volatility.

3 Examples of Bear Markets

Here are a few examples of some of the more notable bear markets in history.

The Great Depression (1929)

The Great Depression started in 1929, and lasted for years. Between 1929 and when the market bottomed-out in 1932, the stock market shed roughly 90% of its value, and didn’t fully recover for decades, until 1954.

The 2008 Financial Crisis

The 2008 financial crisis, which was a part of the Great Recession, actually started in 2007, when the global economy contracted. Its origins are complicated, but in large part trace back to mortgage-related assets and a collapse of the housing market. The resulting bear market lasted for around 17 total months, with the market recovering in March 2009 after the market lost more than half of its value.

The COVID-19 Crash (2020)

Most recently, the COVID-19 pandemic in early 2020 sparked another bear market. The market plummeted starting in late February 2020, and in all, lost 37% of its value over the next month or so. It did rebound fairly fast, though, and the market regained momentum by April.

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).

Bear Markets vs Recessions: What’s the Difference?

A bear market, as noted, marks a 20% or more decline in the stock market. A recession is a broader issue related to the economy. Specifically, a recession is when the economy shrinks or contracts, and we typically don’t know that it’s happening until well after it’s started contracting (and perhaps even after it’s started growing once again). In short, bear markets have to do with stock markets, while recessions refer to negative growth of the broader economy.

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.

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.

How to Invest and Manage Your Money 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. Reassess Your Risk Tolerance

When preparing for a bear market, it’s a good idea to reduce higher-risk holdings such as growth stocks and speculative assets. One can move money into cash, gold, bonds, or other less risky investments to try and 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 Your Portfolio

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, 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. Look for Buying Opportunities

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.

4. Consider Dollar-Cost Averaging

Dollar-cost averaging is an investment strategy that involves making regular, relatively small investments at certain intervals regardless of what’s happening with the broader market or news cycle. In all, the various prices at which investments are purchased average out over time, so if an investor is buying at a fairly high price one week, they may be buying at a relatively low price another week. Over time, the buying prices average out.

That can help some investors lower their overall risk profile, and take some of the emotion out of investment decisions.

5. Understand Advanced Strategies (Like Short Selling)

Short selling is a very risky strategy that some investors take on in anticipation of a potential 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.

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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.

Is a bear market good or bad?

A bear market is probably going to be considered a bad thing by some investors, as it could negatively affect their portfolio value. However, others might consider it an opportunity to utilize strategies to take advantage and potentially, generate returns.

When was the last bear market in the U.S?

The most recent bear market occurred in 2022, and lasted into 2023. During that time, the market lost roughly 25% before recovering.

What are the best assets to hold in a bear market?

Some investors prefer to hold assets that are generally less volatile during bear markets, in the hopes that they’ll hold their value better than more volatile assets. That could include certain types of stocks or funds, bonds, or even commodities such as precious metals.

What was the worst bear market?

The worst bear market in history occurred after the market crash in 1929, and lasted for several years. During that time, the economy entered the Great Depression, and the market lost almost 90% of its value.

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