What is a Bear Market?

A bear market is a securities market trend where prices fall by 20% or more over a two month period. Typically bear markets are associated with declines in the stock market. However, they can also occur in bonds and commodities markets. Bear markets are characterized by negative investor sentiment, recession fears, and heavy sell-off activity.


Bear markets are the opposite of bull markets, where securities prices are rising over a sustained period of time. While stock markets have a long-term upward bias over time, bear markets represent the periodic downturns that occur along the way. Some key characteristics of bear markets include:

• They typically see stocks fall by 20% or more from recent highs
• They can last months or sometimes years
• They are associated with souring economic conditions
• They prompt negative investor sentiment and selling appetites as fear takes over
• They represent downturns amid longer-term upward bull market trends

Here are 8 key things all investors should know about bear markets:

1. Bear Markets Are Normal and Common

While experiencing your first bear market can be disheartening, it's important to know they are relatively common. On average, bear markets occur about once every 3-4 years in the United States. There have been about 25 notable bear markets since the dawn of the 20th century. While bear markets can be painful at the time, they are considered completely normal and even predictable occurrences amid the long-term bull market tendencies of stocks. Knowing bear markets are relatively frequent events can help weather the storm. Though bear markets produce negative sentiment, patient investors are usually rewarded over the long run once the bear market runs its course.

2. There Are Several Catalysts for Bear Markets

Most bear markets occur when overall market confidence fades for some material reason. This can happen for many reasons including economic recessions, craters in commodity prices, wars, high inflation, currency crises, geopolitical tensions, excessive speculation, or major political/regulatory events. Fundamentals like corporate earnings or industry changes could also play a role. In a globally connected economy, bearish conditions often emerge when there are notable downturns overseas. In some cases, there may not be one single catalyst but a combination of negative factors that fuels a bear market's emergence. Sophisticated investors keep a pulse on leading economic indicators across several domains to gauge risks.

3. The Average Bear Market Sees Stocks Decline 30%

According to data from the Stock Trader's Almanac, the average bear market over the past 80 or so years has seen the stock market decline about 30%. However, some have been worse. The 2007-2009 financial crisis bear market (also called the Great Recession bear market) saw stocks fall over 50% from peak to trough. The worst was during the Great Depression in the 1930s when stocks lost almost 90% amid the economic calamity. At over 18 months, the 2007-2009 bear market was also one of the longest. While the averages provide some guidance, each bear market is different in both depth and duration. Patience is key as the long-term upward trajectory usually resumes after a bear market plays out.

4. Bear Markets Usually Last Under 1 Year

On average, most bear markets complete their downward spiral in less than 12 months. According to Hartford Funds research, the average U.S. bear stock market has lasted 289 days from the initial peak to the final trough. However, again there are outliers. For example, the lengthy 2007-2009 bear market dragged on for over a year and a half. The lesson is that while bear markets usually correct within several months to a year, they can persist longer depending on the severity of the market conditions and sentiment factors driving them. Again, patience is usually rewarded for investors who wait it out.

5. Bear Markets Can Offer Long-Term Buying Opportunities

If history has shown us anything, it's that every bear market eventually ends as bullish forces regain momentum. As legendary investor Warren Buffett famously said, "Be fearful when others are greedy, and greedy when others are fearful". This is because bear markets offer opportune long-term entry points for keen investors willing to buy when stocks go on sale. Securities that were overpriced on the way up often become attractively priced for prudent value investors on the way back down during bear markets. Investors with long time horizons focused on fundamentals over emotions usually benefit from steadily accumulating quality stocks amid the pessimism of a bear market. Time and again, this strategy has yielded substantial gains after the recovery takes shape.

6. Recessions Often Accompany Severe Bear Markets

According to the National Bureau of Economic Research (NBER), recessions overlap 71% of the time with bear markets in the S&P 500. Recessions reflect declines in overall economic activity. So when recessions strike, a weakening economy often drags down corporate earnings and stock valuations which fuels bear markets. For example, the 2007-2009 financial crisis bear market coincided with the Great Recession - the worst economic downturn since the Great Depression. Mild recessions don't always spur bear markets. But history has shown the most severe bear markets (declines of 40% or more) have all been accompanied by economic recessions in the U.S. So investors should monitor for recession warning signals like falling GDP, spiking unemployment or distressed credit markets when trying to gauge bear market risk.

7. Government Policies Usually Ease Bear Markets

Government leaders have strong incentives to implement policies aimed at reversing negative market sentiment to get bear markets under control. For example, central banks often aggressively slash interest rates to cheapen borrowing costs during bearish times. This is because excessive stock market declines can threaten overall financial stability if left unchecked. Governments may also pass fiscal stimulus packages like infrastructure spending to bolster economic growth. Bailout packages or emergency lending facilities are also common during major bear markets. While government interventions don't prevent bear markets, they often help facilitate faster recoveries. Wise investors keep policy responses in mind when mapping out worst- and best-case scenarios.

8. Spotting New Bull and Bear Markets Takes Time

There are no defined start and end dates for new bull or bear markets. Instead, investors and economists can usually only pinpoint when they began in hindsight once a new sustained trend has taken shape over many months. As bear markets take hold, no one can predict exactly how long market pessimism will persist or how deep the declines will get. Bull and bear markets are identified retroactively based on the patterns and durations of price movements in indexes like the S&P 500. There are various rules of thumb used to spot new bull and bear trends. But market shifts evolve gradually. Patience remains vital when markets swing to endure uncertainty.

The Bottom Line:

Bear markets are inevitable obstacles even long-term investors must navigate. But those who approach them armed with perspective, discipline, and patience often benefit in the long run by acquiring stocks at discounted values. While bear markets prompt investor panic in real-time, history shows brighter days usually lie ahead once they run their course.

If you enjoyed this article, please read my previous articles

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The Basics of Yield Farming: How to Earn Passive Income in DeFi
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The Power of Automated Market Makers in DeFi
Asset Management in DeFi

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