What is a Bear Market?
A Market Hungry for Gains
As you set forth on your journey into the world of trading, a basic understanding of certain key terms is necessary. Some of this terminology will probably be familiar to you, while some of it may require further explanation. The term bear market, for example, represents an essential trading concept, but what exactly does it mean? How long does a bear market last? And what, if anything, does it have to do with bears? Let’s take a closer look.
What Is a Bear Market?
A bear market refers to a period characterized by a 20 percent or more decline in stock prices, generally over a span of at least two months. Such a scenario presents itself when investors lose confidence in the market following a period of highs. Certain that losses lie ahead, investors start selling off their stock. This fear is contagious, and it spreads throughout the market, causing stock prices to tumble and trading activity to decrease significantly. Though the term usually applies to an index like the Dow Jones Industrial Average, the Nasdaq Composite Index or the S&P 500, individual stocks can enter into bear market territory as well.
Why is it Called a Bear Market?
We refer to a bear market as such due to the direction of its price movement, which is downward. When a bear attacks its prey, it does so with a downward swipe of its paw. As a result of this directional similarity, we refer to a sustained decline in stock prices over a given time frame as a bear market. Eventually, months or possibly even years after a bear market begins, enough optimism will return to the market to justify reinvestment, and the bear market will transition to a bull market.
Types of Bear Markets
There are two main types of bear markets: a secular bear market and a cyclical bear market. The difference lies in their respective durations.
Secular Bear Market
In the case of a secular bear market, it can last for multiple years or possibly even decades.
Cyclical Bear Market
A cyclical bear market, on the other hand, generally only lasts for a few months. Since World War II, the average bear market in the United States has lasted 14 months. The most recent bear market was of the secular variety, occurring during the financial crisis between October 2007 and March 2009.
Bear Market vs. Bull Market
Colloquially speaking, bears are associated with downturns in the market; they’re pessimistic and want to drive stock prices down. Conversely, bulls are associated with market booms; they’re optimistic and want to push stock prices up with their horns. It’s from this upward movement that we get the term bull market, which is the opposite of a bear market. Bull markets represent periods of high investor confidence, heavy buying and, of course, rising prices. Additionally, bull markets tend to last longer than bear markets. The most-recent bull market, which began in March 2009, has already lasted for nearly ten years. On average however, bull markets typically last closer to four and a half years.
Bear Markets in U.S. History
Fallout from a bear market has the potential to be both devastating and long-lasting. Toward the end of the Roaring Twenties, for example, the market suffered a monumental collapse, the Stock Market Crash of 1929. Two months out, the Dow Jones Industrial Average had fallen so sharply that it lost half its value. Pessimism swept through the market like wildfire as investors hurried to sell off their stock while they still had value, fueling what would become the longest bear market in American history, and ushering in the Great Depression. This secular bear market existed until the end of the Second World War in 1945.
Bear Market vs. Market Correction
While bear markets and market corrections are conditions characterized by falling stock prices, it’s important that we not confuse the two. Periods of market correction are shorter in duration than bear markets and fall below the two-month minimum threshold for bear markets. During a market correction, the dip in stock prices is typically smaller than a bear market’s 20 percent drop-off and is usually closer to 10 percent. This provides investors with opportunities to re-enter the market.
Is Another Bear Market On Its Way?
No one can predict exactly when the next bear market is going to hit. It could be in two months, it could be in two years, but it will happen. Why the stock market goes down will likely be a mystery as well, at least until after the fact. There are, however, several factors known to trigger the widespread panic that can serve as a catalyst for a bear market. A high unemployment rate, low earnings & disposable income, as well as a decline in corporate profits are merely some of the signs of an economic slowdown that can create pessimism among investors, setting a bear market into motion. Other factors that could negatively influence the market to such an extent include tax rate changes, sector implosion, and unfavorable economic forecasts.
As of February 2019, we are continuing to ride high on what is currently the longest bull market in history. But, just as a bear market can transition upward, a bull market can make a similar about-face, leading to mass sell-offs from investors that sends stock prices plummeting. This flow of money from one market to another doesn’t mean it’s impossible to make a profit, nor should you be discouraged from trying to do so. It just requires additional preparation. You need to have the right bear market strategy to accompany your bull market strategy, both of which can be obtained with the proper education. If you don’t have a plan, Online Trading Academy can help you formulate one, with a wide variety of different programs available to assist you— even in the most difficult of financial markets.