Bear Market Guide: Definition, Phases, Examples & How to Invest During One

During this period, oil prices fell continually and unevenly until they reached a bottom. The stock market has shown investors some wild times over the past 100 years. From flash crashes to slow and painful declines, we’ve seen the full range of bear markets.

Historically, the S&P 500 price-to-earnings ratio (P/E) has been notably lower during bear markets. When investors are more confident, the P/E ratio typically increases, making stock valuations higher. Professional investors love bear markets because stock prices are considered to be “on sale.” The market went down more than 36%, and this bear market lasted 546 days. The primary factor leading to the recession and market decline was a bust in the dot-com industry. This bear market lasted 622 days, with the overall market dropping 27.11%.

  1. Similarly, oil prices were in a bear market from May 2014 to February 2016.
  2. Bear markets — when stocks decline at least 20 percent from their recent peaks — are relatively rare, and they frequently precede a recession.
  3. News & World Report, Seeking Alpha, and The Motley Fool.
  4. Remaining focused on the long-term is important in the middle of a bear market.
  5. This shows that the markets’ internals are improving and getting stronger.

The S&P 500 has been through 10 bull markets since its inception in March 1957, according to Yardeni Research. The chart below details the start date for each bull market, and it shows how much the S&P 500 gained during the subsequent two years. Since volatility is currently at levels not seen since the 1930s, are we in store for a market where 20% rallies and declines become commonplace again? With a gain of 11% yesterday, many are now even talking about a new bull market occurring in a matter of days.

Short Selling in Bear Markets

The recession started in December of 969 and continued until November 1970. Unemployment peaked at 6.1%, with the GDP falling 1.9% in the fourth quarter of 1969 and 0.60% in the first quarter of 1970. This recession led to a brief recovery in 1971 when the GDP rose 11.3%. The methods for measuring the length and magnitude of bull and bear markets differ among analysts. According to criteria employed by Yardeni Research, for example, there have been 25 bear markets since 1928. The most recent, 10-month 2022 bear market will almost certainly not be the last.

The key is understanding mass psychology’s dynamics, having the courage to act against the crowd, and seeing the potential where others see only peril. In the end, bear markets are about survival, thriving, and laying the foundation for future prosperity. The key to unlocking the potential of bear markets lies in understanding the principles of mass psychology and contrarian investing. Mass psychology, the study of collective human behaviour, plays a significant role in financial markets.

Investors can use financial tools such as the Leading Economic Index as a forward-looking indicator of economic variables. The yield curve is another forward-looking indicator that a bear market may be upon us. The 2020 bear market that lasted a month was the result of a global health crisis compounded by fear, which initially triggered a wave of layoffs, corporate shutdowns, and financial disruptions. Two of the worst bear markets in history occurred roughly in sync with recessions. The stock market crash of 1929 was the central event in a grinding bear market that sliced 89% off the value of the Dow Jones Industrial Average over approximately three years. The Dow rebounded after barely a month as traders looked forward to an economic strengthening.

Even if you do decide to invest with the hope of an upturn, you are likely to take a loss before any turnaround occurs. Thus, most of the profitability can be found in short selling or safer investments, such as fixed-income securities. In the investing world, the terms “bull” and “bear” are frequently used to refer to market conditions. bear markets history These terms describe how stock markets are doing in general—that is, whether they are appreciating or depreciating in value. And as an investor, the direction of the market is a major force that has a huge impact on your portfolio. So, it’s important to understand how each of these market conditions may impact your investments.

Prior to that, the last prolonged bear market in the United States occurred between 2007 and 2009 during the Financial Crisis and lasted for roughly 17 months. One definition of a bear market states that markets are in bear territory when stocks, on average, fall at least 20% off their high. But 20% is an arbitrary percentage, just as a 10% decline is an arbitrary benchmark for a correction. A bull market is an extended period of time during which the stock market rallies more than 20% from a low-water mark. Like bear markets, there is no official definition of a bull market.

Bear 8: October 2007—November 2008

The terms “bear” and “bull” are thought to derive from the way in which each animal behaves. Bulls charge, so the nickname represents a surging stock market. In contrast, bears hibernate, so bears represent a market that’s retreating. The duration of the 12 bear markets since the World War II era .

The Bear Market of 1956-1957: The Eisenhower Recession

Investors must have options privileges in their accounts to make such trades. Outside of a bear market, buying puts is generally safer than short selling. Bear markets are periods when the stock market declines by 20% or more from a recent peak (a 52-week high, for example). Using the S&P 500 Index as a measure, you can see that there have been several bear markets throughout its history. Several leading stock market indexes around the globe endured bear market declines in 2018. Similarly, oil prices were in a bear market from May 2014 to February 2016.

A Bear Market Does Not Indicate a Recession

During this period, the Dow Jones fell sharply from all-time highs close to 30,000 to lows below 19,000 in a matter of weeks. A put option gives the owner the freedom, but not the responsibility, to sell a stock at a specific price on, or before, a certain date. Put options can be used to speculate on falling stock prices, and hedge against falling prices to protect long-only portfolios.

In a previous essay, “Federal Reserve’s Game Plan,” we expound on how the Federal Reserve’s loose monetary policies contributed to the emotional bull market. Bear markets, counterintuitively, usher in new bull markets, with the Federal Reserve playing a role in ensuring this cyclical outcome. Once the bear market is over, getting back to where investors started has often been a long climb. History doesn’t suggest there will be a bottom in the near future, though the declines might not be as large as in the past week. The quick 2020 bear market was as unprecedented as almost everything surrounding COVID-19. Get enough of these reeling valuations together in a group of stocks such as the Standard & Poor’s 500 and you could end up with a bear market – defined as a drop of 20% or more from a closing high.

Because the financial markets are greatly influenced by investors’ attitudes, these terms also denote how investors feel about the market and the ensuing economic trends. The last bear market, which happened in early 2020 as the coronavirus spread and led to widespread global shutdowns, was the shortest on record. But the recovery was relatively quick, with markets recouping losses in six months. The ballooning housing mortgage default crisis caught up with the stock market in October 2007. Back then, the S&P 500 had touched a high of 1,565.15 on October 9, 2007. By March 5, 2009, it had crashed to 682.55, as the extent and ramifications of housing mortgage defaults on the overall economy became clear.

The signs of a weak or slowing economy are typically low employment, low disposable income, weak productivity, and a drop in business profits. In addition, any intervention by the government in the economy can also trigger a bear market. Of the 25 bear markets that have occurred since 1928, fourteen (56%) have occurred with recessions while eleven have not (44%). The bear market that started in March 2020 began due to a number of factors, including shrinking corporate profits and, possibly, the sheer length of the 11-year bull market that preceded it.

In a bull market, investors willingly participate in the hope of obtaining a profit. There have been several instances of near-bear markets in recent decades, and as recently as May 20, the S&P 500 dipped into bear market territory in the afternoon, but rallied before the close. There have been several instances of near-bear markets in recent decades, but it’s rare for them to hit the threshold.

As they do, prices will start to rise again, possibly stabilize. The market is always course-correcting, naturally rising and falling due to supply and demand. Investment advice should always be personally tailored to your portfolio, goals, and risk tolerance, so consult a financial advisor if you need particular guidance. However, markets work in cycles, so many investors choose to wait out the bear markets, and possibly even take advantage of low prices, endure the risk, and buy more. In the years after the “troughs” of the bear markets throughout the stock market’s history, indexes have generally gained close to half of their previous highs. So during widespread recessions or periods of investing fear, the whole market can experience price drops.

Bear markets can last for multiple years or just several weeks. A secular bear market can last anywhere from 10 to 20 years and is characterized by below-average returns on a sustained basis. There may be rallies within secular bear markets where stocks or indexes rally for a period, but the gains are not sustained, and prices revert to lower levels.