A bear market happens when the market is in decline and sentiment is negative.
Everyone is aware that the stock market fluctuates between up and down. If you’re a stockholder, you’d wish to see them rise upwards all the time. However, that’s not the way the markets function. Since both sellers and buyers try to make money from their positions, There will always be an ongoing battle between the market pushing upwards and then pulling back. What exactly is a bear market, and, most importantly, is it possible to earn money in one?
Here are some details about bear markets to aid in understanding the concept and provide a better understanding of how to handle an economic downturn.
What Are Bull and Bear Markets?
In colloquial terms, a bull market means that stocks are increasing and investors are feeling a sense of excitement, whereas a bear market means that everyone is against owning stocks and prices tend to fall. However, Wall Street professionals generally have a more specific answer about what the bull and bear markets mean.
What Is Considered a Bear Market?
Although there isn’t a formal, scientifically proven definition of what constitutes a bearish market, Market professionals typically declare a bearish market after the indexes of market size like the S&P 500, for instance, S&P 500, declined 20 percent from the recent highs.
Typically, bear markets take place in a short period with a slow and brutal decline. However, such decreases can also occur fast. This bear market occurred with the outbreak of COVID-19 at the beginning of 2020, as an example. It was the most rapid on record and dropped more than 20% in 19 days.
What Is Considered a Bull Market?
A bull market is when stocks achieve a steady increase of 20 percent off of their previous lows. When a market is in a bull trend, investors are confident and are likely to invest in buying more stocks. This pushes prices up, which is the reverse of an economic downturn.
Is a Bear Market Good or Bad?
A drop of 20% over some time may be alarming to certain investors, but bear markets are a common element of a normal cycle.
If investors are confident regarding economic and business trends, They’ll purchase stocks until they start to realize that the market is overvalued. Then, they’ll decide to sell their shares. The market consequently falls as it gets to the point that investors can see the value and begin to purchase again. The cycle repeats.
The Positive Side
If a bear market will be good or bad is dependent on the position you’re in. Should you buy in a bearish market? If you’re a long-term investor, buying in a bear market can be a beneficial option. While it’s difficult to bear the immediate suffering of prices falling by 20 percent or more, If you can buy at a lower price, then the market is more likely to rebound to new levels, which it has done in every previous bear market.
Others who’ve sold their stocks intending to buy them back at later prices also enjoy bear markets because that’s the time when they make money.
The Negative Side
However, bear markets can be bad as investing, by nature, involves a feeling.
Certain investors can’t bear the pain of seeing their stocks fall by 20%, 50 percent, or more and end with a loss right at the bottom of the market. When markets turn around and begin a fresh bull market, they are in the back and don’t get to enjoy the resurgence.
Finding a Balance
Whatever kind or type of person you’re, it is important to be ready for the possibility of a bear market at any point. If you do tend to be emotional over stocks, ensure that you have adequate protections to ensure you don’t get sold out at the wrong moment.
Set up automatic investing to ensure that you’re constantly actively contributing to your market even when your instincts tell that you shouldn’t. Also, avoid looking at your portfolio for too long in case you make a wrong decision based on your emotions.
What Causes a Bear Market?
Markets that are experiencing bear markets result from an increase in investor mood. It could be due to a variety of reasons. A weak economy and low earnings in one or two areas of the economy are possible causes.
Psychological and emotional factors can also be a factor in the process, for example, certain investors’ fears that they’ve timed the market right, even though there’s no concrete evidence to support this view.
What To Look For
A sign of a bear market may not be difficult to spot. However, there are certain indicators to watch out for. They include rallies that do not last long or sustained weakening in key economic indicators. External factors, like the COVID-19 pandemic and the Russian invasion of Ukraine, are often caused by bear markets.
The bear market is often seen before or during recessions because the market for stocks is a forward-looking instrument and is often a predictor of a recession, particularly because economic reports are slow indicators.
Is a bear market a sign of recession? Sometimes it does, but not always. As per CenterPoint Securities, eight of the 11 bear markets since 1948 were then followed by recessions. Between the peak of a market and the beginning of a recession lasting between seven and eight months.
What Is the Difference Between a Bear Market and a Correction?
The bear market, as well as a correction in the market, have a lot in common. The most important thing is that a bear market can be described as an even more severe correction. A bear market is generally defined as a decline of 20% or more, and a correction is defined as a decrease of 10 percent or more. %.
How Often Do Corrections and Bear Markets Occur?
Corrections are commonplace and are anticipated to occur about every two years. According to the data of Yardeni Research, there have been 39 S&P 500 corrections since 1950. they’ve happened at a rate of 1.9 years on average.
In contrast, bear markets are typically seen every 3.6 years. That means that although bear markets aren’t common, they happen often from a long-term view.
How Long Do Corrections and Bear Markets Last?
Because corrections are less strenuous than bear market corrections, they do not last long. The average correction has taken 189 days to complete, as per Yardeni Research, and the average bear market lasts around 19 months, as per LPL Research.
But, long-term averages may be misleading. Moreover, bear markets are getting smaller and less. The three bear markets that have occurred in the past that occurred in 2011, 2018, and 2020, averaged 4 to 5 months.
What Are the Phases of a Bear Market?
It can be useful to look at bear markets in stages to know their path.
Bear Market Phases
- The first phase of a bear market may be deceiving as it’s marked by positive investors’ sentiments and higher prices for stocks. This is the last breath in the bear market and the start of a transition into the bear market. Once the bull market has completed its course, the bear market starts.
- Phase two is the drop that occurs when investors’ sentiment is negative, and the selling process begins. The selling may be gradual and controlled, or it may be followed by panic selling.
- Phase 3 is defined by the speculators who are entering the market and beginning to take advantage of bargains.
- The fourth and final phase is the closing process, where selling becomes buying while the market reverses to the bull.
One of the most costly errors that investors can commit is to believe that stock prices will only rise. They aren’t. The market will fall, and bear markets can occur. The best option is to be educated on the basics of investing and be ready for the downs as well as the highs.
The Bottom Line
The bear market can be a source of anxiety for the most experienced of investors. If the market, in general, has dropped by more than 20% and specific names have fallen by 50 percent and more, it may be tempting to think that the market is headed for a collapse and that the entire financial system is about to fall apart.
However, as an old Wall Street axiom says, buying is best when there’s blood on the streets, which means when things appear like they are going to be as dark as it is. If you are in the middle of the bear market, adhere to your investment strategy for the long term, take advantage of bargains, and remain to a minimum.
It could take some time, perhaps even years. However, eventually, the market will be able to recover and then go on to new heights and reward those who remain patient.