What Is A Bear Market? Definition, Causes And What It Means For Your Investments

If you aren’t super familiar with financial markets, you may find some of the associated terms kind of confusing. What do bears and bulls have to do with investing in the stock market? While it’s true that a bear market shows that a market is in a downward trend, there’s a lot more to it than just that – including some potential opportunities for savvy investors.

Bear Market Definition

A bear market is defined as a market whose value has declined 20% or more from its most recent high point. Bear markets are generally paired with economic recessions and a more conservative attitude among investors. Typically, when we think of a drop in the market, we think of stocks, but this can also include other types of investments, such as index funds, bonds or debt securities.

Bear Vs. Bull Market

A bull market is the opposite of a bear market — where a bear market represents a downturn, a bull market is an upturn of stock prices. In a bull market, market index values have risen 20% or more and sustained those increases over a period of at least 2 months.

Confidence tends to be higher when the stock market is in a bull market; investors are seeing bigger returns on their investments, and the larger economy usually does well during these times, too.

Causes Of A Bear Market

The stock market is constantly fluctuating, depending on what investors are doing on a given day (or even a given hour). If you study market trends, you’ll notice that the market can be fairly skittish – sometimes even the slightest sign of uncertainty can cause a dip in the Dow Jones or other stock indexes.

Our economic markets are predicated on the idea of supply and demand. If a lot of people want to buy a stock, its price goes up. If few people are interested in buying a stock, its price will go down. But what motivates an investor to want to buy a stock (or not) in the first place?

When it comes to the market, investors are always trying to figure out what’s going to happen next; it’s their money on the line if everything goes south, after all. So they’re always keeping an eye on things that could move the market, including political conflict, shifts in consumer activity, the rate of inflation, interest rate trends or changes in the bond market. Additionally – and perhaps somewhat ironically – the market is often influenced by how investors feel about it. If the people who have money in the market start to panic that there’s going to be a downturn from a recent high, that could create a sort of self-fulfilling prophecy that causes the market to experience a dip into bear market territory.

Ultimately, there are many reasons why a market could take an extended downturn, and there usually isn’t a single cause when it comes to bear markets, but rather a combination of factors.

Phases Of A Bear Market

One way to think about a bear market is that it happens over four distinct phases:

1. Recognition: Because the stock market fluctuates all the time, it can be hard to identify when a bear market has started. So the first phase of a bear market is recognizing when one of the major indexes has reached at least a 20% decline.
2. Panic: Next, some people tend to get more risk-averse with their money. Emotionally, this makes sense. If someone has money in the stock market (for example, in a 401(k)), the dip in the market has likely caused their funds to shrink. Not wanting to lose any more money, they start making changes to their investment strategy that include forgoing making further investments or even pulling out the money they currently have in the market
3. Stabilization: Once the market has reached bear market territory, stocks start to stabilize. This phase can often be very turbulent as prices go up and down.
4. Anticipation: As stocks start their recovery, it can be hard to recognize. The economic news may still be negative even as the market starts to recover. This sense of anticipation is part of what can fuel the transition out of a bear market.

Examples Of A Bear Market

Here are a few examples of bear markets, along with the past performance of the S&P 500 during the bear market:

• January 1973 to October 1974 – decline of 48.2%
• August 1987 to December 1987 – decline of 33.5%
• October 2007 to March 2009 – decline of 56.8%
• February 2020 to March 2020 (during the COVID-19 pandemic) – decline of 33.9%

Tips For Investing In A Bear Market

There are a few things to consider and tips for investing in a bear market. Here are some things you'll want to keep in mind:

• Keep a diversified portfolio: Diversifying your investment portfolio can be one strategy in a bear market. Different types of investments go up and down in different ways, so having a diverse portfolio can help insulate your portfolio.
• Use dollar-cost averaging: Another strategy is to use dollar-cost averaging as an investment strategy in a bear market. If you have sufficient cash reserves to invest, you may be able to invest in ETFs or other securities at a lower price.
• Focus on long-term goals: If you have a long-term investment strategy, you may not be worried about the value of your portfolio going down over the course of a few months or even years. Historically, the stock market has been a reliable investment strategy, as long as you have a long-term horizon.
• Work with a professional: If high volatility in the stock market makes you nervous or uncomfortable, you might consider working with a professional. A certified financial professional may be able to help you plan a secure financial future that fits within your risk tolerance.

Bear Market FAQs

Are we in a bear market?

The S&P 500 fell into a bear market in June 2022, after dropping more than 20% from its January 2022 high. As of March 2023, we were still in that bear market.

How long does a bear market usually last?

A bear market can last a varied amount of time, depending on overall macroeconomic trends. The bear market of February 2020 lasted only 33 days, while the bear market that started in January 2000 lasted 929 days.

Do you buy or sell in a bear market?

Whether you should buy or sell in a bear market depends on your overall financial situation. It can make sense to hold onto your existing stocks, since they are likely at a lower value. If you have money that you can invest, you might consider buying in a bear market, since many stocks might be considered to be "on sale." We recommend consulting a financial advisor before making any changes to your investment strategy.

What is a bear market vs. a recession?

A bear market is typically defined as a drop of at least 20% in the market from a recent high valuation. A recession is usually defined as a period of at least two consecutive quarters of declining economic activity or gross domestic product (GDP). So while a bear market and a recession may be correlated, they are measured in two different ways.

What is a bear market rally?

A bear market rally is a series of sharp upward rallies within the longer-term trend of a bear market. A bear market may have several bear market rallies (and then additional declines) before it ends.

The Bottom Line

Though economic uncertainty can be scary, it’s all part of the natural cycle of the economy. What goes up must come down eventually (but try to remember that it will go back up again, too). If you’re concerned about how your investments – particularly your retirement investments – will weather a downturn, be sure to talk to your portfolio manager about how you can create a strong, bear-proof investment strategy. Sign up for the Rocket Money℠ app to gain helpful insights into your finances in our ever-changing economy.