A bear market occurs when the stock market experiences prolonged price declines. When the economy is on the back foot, the majority of investors tend to be pessimistic and stock prices go down. Kavan Choksi Finance Expert says that bear markets are commonly limited with declines in an overall market or index like the S&P 500. However, they can also be connected with individual securities or commodities. Bear markets might even be associated with an economic downturn such as a recession.
Kavan Choksi Finance provides an overview of a bear market
The terms “bull market” and “bear market” originate from the contrasting methods of attack used by these animals. A bull thrusts its horns upward when attacking, while a bear swipes downward with its claws. These actions serve as metaphors for market trends: a bull market indicates an upward trend, while a bear market signifies a downward trend. The causes of a bear market can vary, starting from a weak or slowing economy to a pandemic or a bursting market bubble.
Even though are always ebbs and flows in the stock market, a bear market is largely signaled by the following characteristics:
- Stock market declines: There are sustained decreases of 20% or more in broad market indexes in a bear market.
- Economic decline: The economy at large generally weakens as stock markets enter a bear market. This is characterized by declining corporate profits, reduced gross domestic product (GDP), as well as rising unemployment.
- Negative sentiment: Market sentiment is fairly poor during a bear market. Investors tend to be pessimistic about the prospects of the stock market. As a result, they are more likely to sell off assets rather than holding them. In a bear market, investors are more likely to put their funds on safer investments like bonds owing to concerns about future market performance.
- Duration: A bear market is typically more sustained than typical drops in the stock market. A decline has to last for at least two months to be considered to be a bear market. Bear markets last for about 10 months on average.
Bear markets are not exactly uncommon. For instance, US stock markets experienced a bear market during the outbreak of the COVID-19 pandemic in early 2020. Other notable examples of bear markets include after the dotcom bubble burst in 2000 as well as the Great Depression of the 1920s.
As per Kavan Choksi Finance Expert, for investors, seeing the value of their portfolio sharply decline can be quite distressing. However, it is vital to acknowledge that bear markets are normal. The stock market is cyclical. Hence, even though it can be tempting to sell off the stocks when the market is down to protect one’s money; such a strategy can hurt the investors in the long run. If one sells their stocks during a bear market, they are likely to miss out on the rebound that generally takes place as the market reaches its lowest point. The stock market has historically recovered from bear markets and delivered positive returns. As bear markets are usually temporary, the investors who stay the course and hold onto their stocks are typically rewarded for their patience.
