What Is a Bear Market?
Let me explain to you what a bear market really is—it's that market condition where investors like you and me become more risk-averse than risk-seeking, often defined by prices dropping more than 20% from their previous highs.
In simple terms, a bear market means the financial markets are going through extended price drops, usually 20% or more. You'll see this happening alongside widespread pessimism among investors, massive selling of stocks and assets, and an overall weakening economy.
Key Characteristics of Bear Markets
Bear markets aren't just about the broad market or indexes like the S&P 500; even individual stocks or commodities can enter one if they fall 20% or more over at least two months. They often come with economic slumps like recessions and stand in direct opposition to those rising bull markets we're all hoping for.
Key Takeaways
- Bear markets happen when prices drop over 20%, with negative sentiment and a faltering economy in tow.
- They can be cyclical, lasting weeks or months, or secular, dragging on for years or even decades.
- You can still make money in them through short selling, put options, or inverse ETFs as prices tumble.
Understanding Bear Markets
Stock prices show what investors expect from companies, so if profits disappoint or growth falls short, people start selling, driving prices down. This herd mentality and fear can lead to a rush to cut losses, keeping asset prices low for a long time.
One way to define it is when stocks average a 20% drop from highs, but that's arbitrary—just like a 10% drop signals a correction. Another view is when risk aversion takes over, lasting months or years as we avoid speculation for safer bets.
Causes vary, but a sluggish economy, bursting bubbles, pandemics, wars, crises, or shifts like moving online can trigger them. Signs of a weak economy include low employment, reduced disposable income, poor productivity, and falling business profits.
Government actions, like tax or interest rate changes, can spark one too. Dropping investor confidence often leads to selling shares to dodge losses. These markets can last weeks to years—a secular one might run 10-20 years with below-average returns and temporary rallies that fizzle out, while cyclical ones are shorter, from weeks to months.
Recent Bear Markets
Take the U.S. indexes in late 2018—they nearly hit bear territory on December 24, just short of 20% down. More recently, the S&P 500 and Dow plunged into it between March 11 and 12, 2020. Before that, the 2007-2009 Financial Crisis bear market lasted 17 months, with the S&P 500 losing 50%.
In February 2020, the coronavirus pandemic caused a global bear market, dropping the Dow 38% from its February high to a March low in just over a month. But by August, the S&P 500 and Nasdaq hit new highs.
Phases of a Bear Market
Bear markets typically go through four phases. In the first, prices are high and sentiment is positive, but toward the end, investors start pulling out and taking profits.
The second phase sees sharp price falls, dropping trading and profits, with economic indicators turning negative—panic sets in, leading to capitulation.
By the third phase, speculators jump in, boosting some prices and volume.
Finally, in the fourth, prices keep dropping but slower, and as low prices and positive news draw investors back, it transitions to a bull market.
Bear Markets vs. Corrections
Don't mix up a bear market with a correction—that's a short dip lasting less than two months. Corrections can be entry points for value investors, but bear markets rarely are, since spotting the bottom is tough. Unless you're short selling or using other tactics, recovering losses is hard.
From 1900 to 2018, the Dow had about 33 bear markets, one every three years. The 2007-2009 one saw a 54% drop, and 2020's was driven by COVID-19. The Nasdaq entered one in March 2022 amid Ukraine war fears, sanctions, and inflation.
Strategies in Bear Markets
You can profit by short selling—borrowing shares, selling them high, and buying back low. It's risky; if prices rise, losses mount. For example, short 100 shares at $94, cover at $84, and pocket $1,000—but if it goes up, you're in trouble. Short selling isn't for beginners.
Put options let you sell at a set price by a date, good for speculating or hedging. They're safer than shorting outside bear markets if you have options access.
Inverse ETFs move opposite their index—like gaining 1% if the S&P 500 drops 1%. Leveraged ones amplify that, useful for speculation or protection.
Real-World Examples
The 2007 housing crisis hit in October, with the S&P 500 falling from 1,565 to 682 by March 2009. In 2018, indexes neared bear levels. The 2020 COVID bear saw the Dow drop from near 30,000 to below 19,000 in weeks, with the S&P down 34%.
Other cases: the dot-com bust from 2000 wiped 49% off the S&P until 2002, and the 1929 crash started the Great Depression.
Frequently Asked Questions
The big difference from a bull market? Bears are major downturns, bulls are upswings—markets thrive in bulls, struggle in bears.
Is buying good in a bear? For long-term folks, yes, if you can wait for recovery. Short-term traders might short sell instead.
Should you sell? Stick to buy-and-hold with a diversified portfolio; selling in fear means missing rebounds.
The Bottom Line
A bear market signals a weakening economy and fading confidence, with prices down over 20%. It can be brief or long, but buy-and-hold investors can snag deals, while short-term ones use tools like shorts, puts, and inverse ETFs to profit.
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