The bear market is some of the scariest times in the market. During a bear market, assets drop 20% from their recent highs. But buyers who plan to stay put can do so.
What does “bear market” mean?
A bear market is when the prices of investments drop for a long time. Usually, a bear market happens when a broad market measure drops by 20% or more from its most recent high. A bull market, with gains of 20% or more, is the opposite of a bad market.
Even though 20% is the cutoff, bear markets often go much lower than that over a long length of time. During a bear market, there may be a few “relief rallies,” but the overall direction is down. Investors who are pessimistic and lacking in trust are a sign of bear markets. When there is a bear market, investors often don’t care about good news and keep selling investments, which makes prices drop even more. Investors eventually start to see stocks at prices they’d be happy with and start buying, which finally ends the bear market.
Each stock can go down in value as well as the market as a whole, like the Dow Jones Industrial Average. If buyers don’t like a certain stock, it probably won’t have an effect on the market as a whole. But when a market or index goes “bearish,” almost all of the stocks in it start to go down, even if they’re all reporting good news and rising earnings.
What makes bear markets happen, and how long do they last?
There isn’t always a bear market right before or after the economy goes into a slump.
When investors think the economy is slowing down, they keep a close eye on jobs, wage growth, inflation, and interest rates.
Investors think that company profits will go down soon when they see that the economy is shrinking. So they sell stocks, which makes the market go down. A bear market can mean that there will be more joblessness and tougher economic times ahead.
Bull markets last for an average of 1,742 days, while bear markets last for an average of 363 days. Invesco data shows that they are generally less bad than bull markets, with average losses of 33% compared to average gains of 159% during bull markets.
How do I know when the market is going to go down?
After the fact, bear markets seem very clear, but remember that 20/20 vision is always 20/20. It’s not always easy to tell when stock prices have reached their highest point and a bear market is about to start or when a slight correction will turn into a full-blown bear.
But buyers do follow some general rules. A good way to tell if a bear market is coming on is to keep an eye on interest rates. When the economy slows down, the Federal Reserve drops interest rates. This is a good sign that a bear market might be coming. Bear markets do happen sometimes before interest rates go down, though.
You shouldn’t change how you trade just because there are signs that a bear market might be coming. Long-term buyers shouldn’t try to guess what will happen in the market. Instead, make sure that the money you put into your portfolio is money you won’t need for five years, that it is well-diversified, and that it fits your risk level. It’s more likely that you’ll do better than someone trying to time the market if you do this.
What distinguishes a market correction from a bear market?
Bear markets are fiercer versions of market corrections, which are quick, shallow stock price decreases of 10% to 20%. Short corrections are common. In the 2009–2020 bull market, the S&P 500 saw six corrections.
Most corrections don’t become bear markets. Only four of the 22 market declines from 1974 to 2018 became bear markets.
What distinguishes a bull market from a bear market?
A 20% or greater decline in stock prices is indicative of a bear market, whereas a 20% or greater increase in stock prices is indicative of a bull market. Bull markets are characterized by an enthusiastic investor base that rewards even somewhat positive news with increased stock prices, setting off an upward spiral.
Basically, bear markets are bad.
It’s scary when stock prices drop 20% or more from their most recent high, but buyers shouldn’t freak out.
The average bear market lasts less than a year. Simple strategies like dollar-cost averaging, diversification, investing in areas that tend to do well in recessions, and keeping an eye on the long term can help investors weather the storm.
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