What is a Bear Market in economics and investing?
Why a bear is used to represent falling stock prices? Can I get good results in this scenario? Yes, you can. Come with us and discover how!
by Thais Daou
Find out everything about what is a Bear Market here
Do you know what is a Bear Market? If you do not, then you are in the right place! This term refers to a financial market scenario that relates to the stock exchange. More specifically, we use this term to represent a stock market downward trend.
For example, when a specific stock, segment, or the market as a whole, has days when the numbers are consistently dropping (or bearish), this is Bear Market.
So, we want to start this conversation by telling you the most important and obvious thing you should know. Anyone who wishes to become an investor should know there is no escaping from a bear market. But anyone who wishes to become a successful investor should learn everything s/he can about past and future bear market patterns.
That being said, shall we learn about it together?
Glossary of investment terms for beginners
Check out our glossary of investment terms and learn more about the basic definitions of various concepts used in the financial world!
How does a Bear Market work?
In fact, we can define a Bear Market as a significant decline in asset prices over a long period of time. Regarding how long they can last, we will look at some numbers below. We also call these periods of a bearish market. But we can also say that the market is in a bearish mood.
When publicly traded companies face a decrease in their profit expectations, many investors will consequently sell their positions. As a result, it does not matter if other listed companies continue to expand their operations. Because the stock price in general will most likely not keep pace with the improved results.
However, this also means that value investors can then take advantage of this period. Why? Because it is when one can enter good businesses at prices below their intrinsic value.
Can you understand now why it is important to study Bear Markets? This knowledge is critical for long-term investors who want to buy stocks with a margin of safety.
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What is a bear market? Some examples!
Some research data
Below you can find some data on U.S. Bear Markets after the Second World War. By analyzing the following table, you will be able to study some bear market patterns.
Post World II bear markets
|Start (Peak)||Duration (Months)||S&P 500 return|
|May 29, 1946||36||-30%|
|August 2, 1956||15||-22%|
|December 12, 1961||6||-28%|
|February 9, 1966||8||-22%|
|November 29, 1968||18||-36%|
|January 11, 1973||21||-48%|
|November 28, 1980||20||-27%|
|August 25, 1987||3||-34%|
|July 16, 1990||3||-20%|
|March 27, 2000||31||-49%|
|October 9, 2007||17||-57%|
According to the data above, one can see that a U.S. bear market period occurred, on average, once every five years in the past. And each one lasted, on average, 16.2 months. In other words, one and a half years. The longest lasted 36 months, or three years, from May 1946 to June 1949. Finally, by looking at the table, one can also see that their drops ranged a lot, from 22% to 57%.
How to interpret Bear Market data
- Stock markets drops and oscillations: a falling stock market and sideways consequences in stock prices are the easiest indicators to spot. Generally speaking, we tend to see these changes in prices first. These indicators mean that stocks and other financial assets now present lower prices. But this is exactly how bear markets work, anyway.
- Stock markets’ uncertainty gone extreme: when the market is in a state of flux, investors try to avoid risky assets. And this is why the stock prices fall. Because people start investing less in the stock market.
- Multiple investors abandoning stocks: a third sign you should watch out for is multiple investors shifting from variable to fixed income. Aside from a falling stock market, the withdrawal from stocks occurs primarily when the economy’s interest rate is high. This results in higher returns for investors who buy government bonds, for example.
- Financial market crisis that appears to have no end in sight: this fourth sign is one we usually spot later on. After all, the fear is already installed. The financial consequences are playing their part. And everyone, investors and non-investors, just wants it to be over soon.
As a result, this movement appears to be very long. But, then, when the end of the crisis approaches, or when the market sees a light at the end of the tunnel, it anticipates and closes the bear market before the real economy begins to work again.
Is a bear market good or bad?
Origin of the term
You have probably already heard this term. It is quite old, after all. As we have already seen, it basically represents a mood that the stock market creates due to some movements of the economy. However, recently, people are also using it in other financial market scenarios, such as bonds, currencies, cryptocurrencies, etc.
But why a bear? Well, have you ever thought of how a bear (the savage animal) behaves? Whenever it feels a threat, it stands up on two feet and, with its claws, it starts going down. See? Due to this, we borrowed its name to represent whenever the market is moving downward.
When a specific stock or market as a whole is already falling and, in addition, experiences more negative movements, this is called a down (or bearish) trend. In terms of numbers, the use of this classification refers to a drop of more than 20% in a given asset or market. As we said, of course, when there already was a previous similar high drop. When this scenario accounts for 80% of the total market, we apply the term broadly.
Bearish vs. bullish
But if Bear Market is a negative wave in the financial market, is there a proper term to represent a positive wave? And, more importantly, which animal could we use as a symbol? Now is a good time to recall Wall Street, New York City. The symbol of the greatest stock exchange in the world. More specifically, we want you to picture Wall Street’s famous sculpture, the Charging Bull.
As opposed to the picture of the bear, we have the picture of the bull. Moreover, the term Bull Market will represent the inverse phenomenon. It is characterized by a rising market. During a Bull Market scenario, investors experience a period of market optimism. Stock prices rise, and demand for them continues to rise.
Both terms, Bear and Bull Market, are usually used in conjunction with two other terms: bearish and bullish. Simply put, bearish refers to a scenario in which investors keep their expectations low because they expect market prices to fall. Thus, bullish refers to the opposite scenario. Investors become optimistic and believe that stock prices will rise.
What stocks do well in a bear market?
How long does a bull market typically last?
Although we can study past duration periods patterns, not even the best of the Economics specialist can predict how long a Bear Market will last. The same goes for Bull Markets. After all, we are talking about variable income, right? The variable income market is influenced by macroeconomic and microeconomic changes, as well as by significant market segment decisions and changes in listed companies.
How can you profit from this stock market movement?
You now understand what is a bear market and how you can spot it. Despite the fact that it refers to a negative period in the stock market, it can provide positive opportunities for investors who invest intelligently. Therefore, as we believe you are an intelligent investor, here are a few more tips.
First, when you spot a Bear Market coming, try to take advantage of the low stock prices. Do that by purchasing stocks at a discount. When the market prices start rising again, you can sell your stocks after they have appreciated. However, be aware that such appreciations usually occur in the long run. Be patient.
A second strategy that you can use is short selling. It entails selling an asset that you do not have in your portfolio. It is done through stock rental. The plan is to sell an asset at a higher price. After it falls in value, repurchase it at a lower price and return it to the lender.
Thus, profiting from this difference in prices is possible after you deduct the rental fee and the other costs involved. However, keep in mind that these operations are very risky. Because price movements are impossible to predict.
How do you develop assertive strategies?
As you can see, if you are willing to seek the right knowledge, it is possible to achieve good investment results even in a Bear Market. Investment education keeps you from making investments that are not in line with your profile, planning, and objectives.
If time is something difficult to find on your agenda, consider hiring an investment advisory service. Nowadays, these services vary in form, price, and benefit. But they can help you capitalize on the opportunities presented by stock market movements. Not to mention that it can allow you to capitalize on both bear and bull market opportunities.
Now you definitely understand the essential about what is a bear market. This is the first step to profit from this stock market movement. From now on, it will be easier for you to implement the appropriate strategies at various times.
Always keep in mind your profile and financial goals. Adapt the market movements to them. And, for more deep knowledge, keep reading our content.
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