What Is a Bear Market?
As an investor, the words “bear market” might run a shiver up your spine. They’re a period often characterized by fear, uncertainty, and conservatism, as opposed to the abundance and confidence of a bull market. However, there are plenty of ways to weather a bear market with your confidence and security intact. This guide will help you discover the hidden truths of bear markets and how to survive them with Sovereign Financial.
What Is A Bear Market?
A bear market is defined as a market that is in significant decline — typically 20% from the historical average. While the term is most commonly associated with the major stock market indexes such as the Dow Jones Industrial Average, S&P 500, or Nasdaq, it can refer to significant declines in the value of any appreciable assets including real estate, lending and saving assets, and private equity.
Examples of Bear Markets
To the average individual, a bear market can seem like any depreciation in the stock market, but there is a difference between a true bear market and a correction, where a drop greater than 10% but less than 20% occurs. Since 1974, of the 22 corrections that have occurred, only four became true bear markets.
The last significant bear market in the United States occurred between 2007 and 2009 due to the housing mortgage crisis. During this time the S&P 500 lost nearly 50% of its value and didn’t recover for 17 months. Since the recovery of the Financial Crisis of 2007-2009, the U.S. has had very few bear market events. The market dipped nearly 20% around the Christmas of 2018 and fell again in the spring of 2020 due to the COVID-19 crisis. However, this short bear market lasted only 33 days, when between February 19 and March 23 they bottomed out.
Since then, stock prices and real estate markets have been on the incline, but how long this will last is uncertain.
What Causes a Bear Market?
Stock prices fall in accordance with investor attitudes and predictions for the future. As cash flows stagnate and a few investors start practicing caution, herd behavior will soon cause the rest to follow. Some of the common causes of this shift in expectations include:
- A market bubble busts
- Wars or international tension
- Economical paradigm shifts (such as the dot-com crash of the early 2000s)
- Tax rate changes
- High unemployment rates
- National or international crises (Such as the COVID-19 pandemic)
What Is the Difference Between a Bear Market and a Bull Market?
As opposed to the bear market, a bull market is a period of growth, typically 20% or more above the historical average. Bull markets are also characterized by steady increases, not just hitting the 20% marker, but typically they end up rising above the historical average significantly.
Bull markets are like a bull charging into combat — fierce, confident, and strong. The bear market is like a hibernating grizzly – sluggish and disappointing. However, just like the grizzly, bear markets can strike fear into investors’ hearts because they can lead to recessions and long-term losses that are difficult to recover from.
What Type of Market are We In Right Now?
Since the fall of 2020, the U.S. has been in a secular (long-term) bull market. Despite the short bear market in early 2020, analysts believe that the bull trend will continue to rise as the economy recovers from COVID-19 disruptions. However, any investor should be prepared for the inevitability of a bear market, and know what to expect when one comes around.
What Does this Mean for Investors?
Experiencing a bear market, even for a short period of time, can strike fear into an investor’s heart, leading them to become more cautious even in bull market territory. However, if you realize the potential in both bear and bull market scenarios, you can become a much more savvy investor.
Sooner or later a turnaround will always occur. As interest rates lower and lower, spending begins to flourish and the stock market will rebound. It simply requires patience and a vigilant eye to turn a bear market into an opportunity for savvy investing.
Get Help Investing from Sovereign Financial
Sovereign Financial understands how bear markets can affect the confidence of investors, especially as they get closer to retirement. Our goal is to help you turn any market situation into an advantage and help you choose a portfolio of assets that will wade through muddy waters. Our values-based investing approach guarantees long-term growth that doesn’t require sacrifices personally or financially.
Talk to us today to learn how to better bolster your portfolio against bear market conditions.