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Bear Market

Категорія — Загальні поняття
By Irina Balalaeva, International Fixed Income Group of Cbonds
Updated June 26, 2024

What Is a Bear Market?

A bear market is a term used in the stock market to describe a prolonged period of declining stock prices. During a bear market, the overall sentiment among investors is pessimistic, leading to a sustained decline in stock prices. This phase is characterized by a 20% or greater drop in the value of a broad market index, such as the S&P 500. Bear markets can last for several months or even years and are generally associated with economic downturns, declining corporate profits, and a generally slowing economy.

In a bear market, investors tend to be cautious and may start selling their stocks to limit losses, which can further drive down market prices. This is the opposite of a bull market, where stock prices are generally rising, and investor sentiment is optimistic. To navigate bear markets effectively, investors often employ strategies like diversifying their portfolios, practicing dollar-cost averaging, and seeking advice from financial advisors to minimize the impact on their investments. It’s important to note that past performance in the stock market is not indicative of future results, and bear markets are a natural part of the market’s cyclical nature.

Bear Market

Key Features of a Bear Market

  1. Stock Market Declines. A bear market is characterized by significant and sustained declines in stock prices. Typically, these declines reach or exceed 20% in broad market indexes, such as the S&P 500. Investors witness a continuous drop in the value of their investments during this phase.

  2. Economic Decline. A bear market often coincides with a weakening broader economy. Economic indicators like rising unemployment, and declining corporate profits are common during this period. These factors contribute to the negative sentiment surrounding the market.

  3. Negative Sentiment. Bear markets are marked by a prevailing sense of pessimism among investors. Market sentiment is generally poor, and investors become apprehensive about the stock market’s future performance. This negative sentiment leads many investors to sell their assets rather than hold onto them. Investors often seek refuge in safer investments like bonds due to concerns about the market’s prospects.

  4. Duration. Bear markets are more than just short-lived dips in the stock market. On average, bear markets tend to last for approximately 10 months. This extended duration can test investors’ patience and require careful financial planning.

What is the Typical Duration of Bear Markets?

The typical duration of bear markets can vary, but historical data provides us with some insights into their average length. According to CFRA data on the S&P 500®, bear markets have shown different durations over the years.

The shortest bear markets on record lasted approximately three months, occurring notably in 1987 and 1990. These were relatively brief periods of declining stock prices.

Conversely, the longest bear market persisted for an extended three-year period, from 1946 to 1949. This prolonged bear market brought about significant challenges for investors.

When considering the past 12 bear markets, the average length of a bear market is approximately 14 months. This average duration helps provide context for investors, illustrating that bear markets can vary in length and may last for over a year on average.

Investors should be aware of these historical trends in bear market durations to plan and strategize accordingly when facing such market conditions.

What are the Causes of Bear Markets?

  1. Economic Slowdown. A bear market often occurs just before or after the economy moves into a recession, although it’s not always the case. Economic slowdowns can lead to a decline in consumer and business confidence, which in turn affects the stock market.

  2. Anticipated Corporate Profit Decline. In a bear market, investors typically anticipate a decline in corporate profits in the near future. This expectation leads them to sell their stocks, which exerts downward pressure on the market. Falling corporate profits can result from reduced consumer spending, decreased business investment, or increased production costs.

  3. Market Sentiment. Bear markets are often characterized by negative market sentiment. Investors become pessimistic about the stock market’s prospects, and this sentiment can lead to widespread selling of assets as investors try to limit their losses.

  4. Unemployment Concerns. A bear market can be a harbinger of more unemployment and tougher economic times ahead. As the stock market declines, businesses may cut costs, including reducing their workforce, to adapt to challenging economic conditions.

How to Invest in a Bear Market

  1. Maintain a Long-Term Perspective. It’s crucial to keep a long-term perspective when investing in a bear market. While seeing the value of your portfolio decline can be distressing, remember that bear markets are normal, and the stock market is cyclical. Avoid the temptation to sell your stocks when the market is down to protect your money in the short term.

  2. Don’t Miss the Rebound. Bear markets are typically followed by a rebound in stock prices. If you sell your stocks during a bear market, you may miss out on the recovery that often occurs after the market reaches its lowest point. This can result in missed opportunities for gains.

  3. Avoid Selling at a Loss. If you need to access cash during a bear market, be cautious about selling your stocks at a loss. It’s generally better to have a well-planned emergency fund or cash reserves to cover unexpected expenses, so you don’t have to liquidate your investments at unfavorable prices.

  4. Historical Perspective. Historical data shows that the stock market has a track record of recovering from bear markets and producing positive returns. Over the long term, the average annual return on a stock portfolio, between 1926 and 2021, was 12.3%. This demonstrates the resilience of the market over time.

  5. Patience Pays Off. New investors, in particular, may feel anxious when they see the market declining. However, it’s important to understand that bear markets are typically temporary. Investors who stay the course and hold onto their stocks during a bear market are often rewarded for their patience when the market rebounds.

  6. Diversify Your Portfolio. Diversification is a key strategy to reduce risk. In a bear market, having a diversified portfolio that includes different asset classes can help cushion the impact of market declines. Consider including bonds and other investments alongside stocks.

  7. Seek Professional Advice. If you’re uncertain about how to navigate a bear market or need personalized guidance, it’s a good idea to consult with a financial advisor. They can help you develop a strategy that aligns with your financial goals and risk tolerance.

While most investors aim to weather the storm during a bear market, some traders, particularly experienced ones, employ short-selling strategies. Short selling involves selling borrowed shares and buying them back at lower prices. It’s important to note that short selling is an extremely risky technique and can result in significant losses if it doesn’t work out as planned. Short sellers must borrow shares from a broker before executing a short sell order. Profits and losses in short selling are determined by the difference between the selling price and the price at which the shares are bought back, referred to as "covered."

For example, an investor shorts 100 shares of a stock at $94, and the price falls, allowing the investor to cover the shares at $84. In this case, the investor pockets a profit of $10 per share, resulting in a total profit of $1,000. However, if the stock unexpectedly trades higher, the short seller is forced to buy back the shares at a premium, potentially causing heavy losses.

Bear vs. Bull Market

Direction of Market Movement

  • Bear Market. In a bear market, stock prices are in a declining trend. This phase is marked by a sustained decrease in the value of a broad market index (often 20% or more) over an extended period.

  • Bull Market. A bull market, on the other hand, is characterized by rising stock prices. It’s a period of sustained market optimism and increasing investor confidence.

Investor Sentiment

  • Bear Market. In bear markets, investor sentiment is generally pessimistic. There’s a sense of fear and caution among investors, leading many to sell their stocks in an attempt to limit losses.

  • Bull Market. Bull markets are associated with positive investor sentiment. Investors are more optimistic about the future of the stock market, leading to increased buying and a generally positive outlook.

Economic Conditions

  • Bear Market. Bear markets often occur during or preceding economic downturns. Factors such as rising unemployment, declining corporate profits, and a weakening economy can contribute to the onset of a bear market.

  • Bull Market. Bull markets typically coincide with economic growth and recovery. Strong economic indicators, like low unemployment, increasing corporate profits, and a healthy GDP, often support a bull market.

Duration

  • Bear Market. Bear markets can last for an extended period, often several months to a few years, before the market begins to recover. The average duration of a bear market is around 14 months.

  • Bull Market. Bull markets tend to last longer than bear markets. They can persist for several years, with some bull markets lasting a decade or more.

Market Behavior

  • Bear Market. In a bear market, there is a downward trend in stock prices, which can lead to widespread selling and a focus on preserving capital.

  • Bull Market. In bull markets, stock prices are on the rise, which encourages buying and a focus on capital growth.

Market Opportunities

  • Bear Market. Bear markets can present opportunities for value investors looking to buy stocks at discounted prices. It’s a time when long-term investors may consider accumulating shares for future growth.

  • Bull Market. Bull markets are favorable for investors who already hold stocks as their portfolio values increase. Traders may also benefit from market momentum.

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