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What is a Bear Market?

Jaiya Gill

What is a Bear Market?

Whether you're in a bear market, expecting one, or otherwise, we've got all the info you need to feel prepared to weather it.

"The Stock Market is at a Bull/Bear Tipping Point" – Forbes

What is a bear market?

Simply put, a bear market is a period where the stock prices are falling by 20% or more for a prolonged period of time. The term ‘bear market’ is used to describe a downward trending stock market. This is most commonly measured by the performance of the S&P 500 Index which is generally considered a benchmark indicator of the entire stock market.

It is important to note that a bear market is different from a stock market correction. A correction is when the stock prices go down by 10% but less than 20% and a stock market correction could eventually lead to a bear market if prolonged.

Characteristics of a bear market

  • Bear markets are usually caused due to investor fear or uncertainty but the factors can be plenty. As share prices drop, investors begin losing faith in their recovery and this can lead to further drops. Investors may keep their money out of the market, causing further decline. 
  • A sluggish economy, bursting market bubbles, pandemics, inflation, interest rates, investor speculation, geopolitical situations and more can cause a bear market. In a bear market, the demand for securities fall, as more people are selling securities than buying them.
  • A bear market can signal more unemployment and tougher economic times ahead. This may lead to companies laying off workers and investors becoming more risk averse. Consumers may slow their spending, causing businesses to record lower profits, leading the market to value their stocks lower. 

On one hand, this period can be scary and nobody wants their portfolio to go down. On the other hand, it could be an opportunity to invest at a discount and benefit in the long run.

Disclaimer: This is not financial advice.

Preparing for a bear market

Historically speaking, bear markets have tended to be shorter than bull markets. They are a part of the stock market cycle and don't last forever. The market has always recovered. During this period, investors often try to time the markets in order to avoid their portfolio taking a hit but timing the markets barely works as one can miss out on strong days too.

Half of the S&P 500 Index’s strongest days in the last 20 years occurred during a bear market. 

Whether the market is bullish or bearish, a good rule of thumb to follow when it comes to investing is to not let emotions get in the way and be more long-term minded. Statistically, individual investors underperform the overall stock market, since they’re more likely to buy and sell their positions based on emotion and may not hold their positions long enough to realize the long-term benefit.  

Another way to prepare for bear markets is to make sure to diversify your portfolio and rebalance it if needed. Bear markets also make the case for index funds as they're the closest representation of the entire stock market and when the market recovers, the index does too.

Generally, investors look for a 20% gain from a low point and sustained gains over at least a six-month period to signal the end of a bear market. All in all, bear markets are a normal part of the stock market life cycle and don't last forever.

If you want to learn more on how to prepare for a bear market, Charles Schwab has a great resource, which you can view here.

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