A bear market is a prolonged decline in market prices. This is a situation in which securities prices drop 20% or more from their recent highs, amid widespread pessimism. Bear markets are usually associated with declines of an index or overall market like the S&P 500. However, individual securities and commodities can be considered to be in bear markets if they experience a decrease of 20% or more over a sustained time period (typically two months or longer). General economic downturns, such as a recession, can also lead to bear markets. Contrast bear markets with the bull market that is in an upward trend
Phases Of a Bear Market
Bear markets typically have four phases.
- High prices and high investor sentiment are the hallmarks of the first phase. Investors begin to withdraw from the markets towards the end of this phase and start to take in profits.
- The second phase is when stock prices start to plummet, corporate profits and trading activity begin to decline, and other economic indicators that were once positive begin to dip below the average. As sentiment begins to drop, investors panic. This is capitulation.
- The third phase sees speculators enter the market, raising prices and increasing trading volume.
- Stock prices drop slowly in the fourth and final phase. Bear markets lead to a bull market as investors start to be attracted to good news and low prices again.
“Bull” And “Bear”
A bear market is named after the way a bear attacks prey, swiping its feet downward. Markets with falling stock prices are known as bear markets. The bull market is named after the bull’s aggressive behavior of raising its horns into the air, just like the bear markets.
Bear Markets vs. Corrections
A correction is a shorter-term trend with a shorter duration than two months. While corrections can be a great time for value investors to locate an entry-level into the stock market, bear markets are rarely able to provide such an entry point. It is nearly impossible to identify a bear market’s bottom. Recouping losses can be difficult unless investors are short-sellers and/or use other strategies to gain in falling markets.
7 The most recent bear market in recent history was the one that occurred between October 2007-March 2009. 4 In that period, the Dow Jones Industrial Average (DJIA), fell 54%. This was due to the global COVID-19 pandemic which caused the latest 2020 bear market for both the S&P 500 & DJIA. In March 2022, the Nasdaq Composite entered a bearish market due to fears about war in Ukraine, high inflation, and economic sanctions against Russia.
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