What is a Bear Market?
Bear Market Meaning
Bear markets are described as periods of prolonged price declines in the financial markets. Typically, economists and journalists will use the term “bear market” to describe a security falling by 20% or more from recent highs followed by bearish investor sentiment.
Bear markets are often associated with major declines in a market index such as the FTSE100 or the S&P500. However, individual stocks, securities or commodities can be described as being in a bear market if there is more than a 20% decline over two months or more.
Recessions are also highly correlated with bear markets as recessions are followed by overall falling demand, less disposable income and higher unemployment.
Definition and Examples of Bear Markets
Bear markets are defined as a 20% drop from the most recent highs, commonly used to describe stock market indices of economies. Bear markets can however be referred to any stock, exchange rate, commodity or index as long as prices have fallen by 20% from previous highs.
For example, between 2000 and 2003 the FTSE100 experienced a break market as it fell over 20% during this period.
One way economists, traders and investors try to forecast a bear market is by utilising the PMI index. This leading survey questions purchasing managers and gets their thoughts on future economic conditions, these insights help forecast potential bullish or bearish markets.
Corrections and bear markets are terms used synonymously, however corrections are less impactful than bear markets. Corrections are drops of 10% from previous highs, it turns into a bear market if corrections fall further to the 20% mark.
Alternate names: Bearish, Recession, Pessimistic, Sell, Correction
Bear Market Examples
Bear markets are cyclical in nature, they inevitably come so being prepared is important. The most recent bear markets are as followed:
2020 Covid-19 Pandemic
2008 Financial Crisis
2000 Dot com bubble
How Bear Markets Work
Bear markets are generally caused by investor fear and uncertainty, this can be come from a various causes such as:
Natural disasters
Poor company performance and accounting
Supply chain shocks
Demand shocks
Over leveraged investing
The most recent example of a natural disaster creating a recession was during the 2020 COVID-19 pandemic. The infections overwhelmed hospitals which caused governments to create lockdowns, these lockdowns and other strict regulations started to cause reduced spending in the economy, loss of jobs and investor panic.
Bear Market vs Bull Market
Bull market and bear markets happen continuously over time. When a bear market ends a bull market starts. Bull markets are when the price of a stock or market rises by 20% over two months with optimistic market sentiment. Generally new market highs will be made during a bull market and investors make money by buying the stock market.
What does It Mean for Investors
Retail traders and investors must understand the difference between a bull market and bear market. This can drastically affect how investors see the market and thus your trades and investments may be affected. Understanding when a market is bearish will help a young investor find great trading opportunities.
