What does a Bear Market mean?
A bear market is a situation when a market’s shares price drops over an extended period of time. It usually refers to a situation when stock values have fallen 20% or more from recent highs due to widespread pessimism and poor market sentiment. Individual securities or commodities can be considered in a bear market if they experience a 20% or more decline over a sustained period of time—typically 8 weeks or more. Bear markets are often associated with declines in an overall market or index like the S&P 500, but individual securities or commodities can also be considered in a bear market if they experience a 20% or more decline over a sustained period of time—typically 2 months or more. Bear markets can also occur in conjunction with broader economic downturns, such as depression. Bear markets can be juxtaposed with bull markets that are going higher. In general, stock prices represent future expectations of cash flows and earnings from businesses. Stock prices might fall when growth prospects fade and hopes are disappointed. Long periods of low asset prices can be caused by herd behaviour, panic, and a rush to protect against negative losses. Markets are in bear territory, according to one definition, when equities have fallen by at least 20% from their peak. However, just as a 10% fall is an artificial baseline for a correction, 20% is an arbitrary amount. A bear market is also defined as a period in which investors are more risk-averse than risk-seeking. This type of bear market can persist for months or even years as investors avoid risky investments in favour of safe bets. A bear market can be caused by a variety of factors, but in general, a weak, faltering, or sluggish economy will result in a bear market. Low employment, low discretionary income, weak productivity, and a decline in company earnings are all indications of a weak or declining economy. Furthermore, any government involvement in the economy might set off a bear market. Changes in the tax rate or the federal funds rate, for example, might cause a bear market. A decline in investor confidence, on the other hand, may herald the start of a bear market. Investors will take action if they feel something bad is likely to happen, in this example, selling shares to avert losses. Bear markets might span several years or only a few weeks. A secular bear market can last anywhere from ten to twenty years and is defined by consistently poor returns. Within secular bad markets, there may be rallies in which stocks or indexes rise for a while, but the gains are not sustained, and prices fall to lower levels. On the other hand, a cyclical bear market might run anywhere from a few weeks to many months.A Bear Market’s Stages
Bear markets generally go through four stages which are:- First phase: High pricing and positive investor mood define the first phase. Investors begin to exit the markets and collect profits at the end of this period.
- Second Phase: In the second phase, share prices start falling rapidly, trading volume and corporate earnings start to decline, and previously optimistic economic indicators begin to deteriorate. As investor morale becomes worse, some investors grow terrified. Capitulation is really the terminology for this.
- Third Phase: Speculators begin to dominate the market in the third phase, causing both prices and trading volume to rise.
- Fourth Phase: Share prices keep falling in the fourth and final phase, though at a slower pace. Bear markets are giving way to bull markets as cheap prices and positive news re-attract investors.
Examples of a bear market
Bear markets are a regular occurrence. There have been 33 since 1900, with one occurring every 3.6 years on average. To give three contemporary instances, consider the following:- The dot-com bust of 2000-2002: In the late 1990s, the increased usage of the internet resulted in a large speculative bubble in technology companies. After the bubble burst, all major indexes went into the bear market territory, but the Nasdaq was particularly badly hit: It has dropped by roughly 75% from its prior highs by late 2002.
- 2008-2009: In 2008, a global financial crisis erupted as a result of a flood of subprime mortgage lending and the subsequent packaging of these debts into investable securities. Many banks collapsed, necessitating large bailouts to save the US financial system from imploding. The S&P 500 had dropped more than 50% from its prior highs by the time it hit its lows in March 2009.
- Pandemic crash: The COVID-19 epidemic, which swept across the globe and caused economic shutdowns in most major countries, including the United States, sparked the 2020 bear market. The stock market’s slide into a bear market in early 2020 was the fastest in history due to the speed with which economic anxiety spread.