Bear market: Meaning and history

Glossary

What is a bear market?

A bear market is a period in which most investors are pessimistic and stock prices fall, usually by 20 per cent or more from the most recent peak. It often concerns the stock market as a whole, but a bear market can also occur within a specific market, index or sector. In practice, you see prices falling over a longer period and the sentiment is clearly negative.

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Why is it called a bear market?

The term ‘bear market’ refers to the way a bear attacks: with its claws from top to bottom. That downward movement symbolises a declining market in which prices fall and rates are under pressure.

Bearish: The meaning

Bearish refers to a negative expectation about the market. If you are bearish, you expect prices to fall further. That sentiment can already be present before there is officially a bear market. Investors often react to news, trends and the behaviour of others. As a result, pessimism can reinforce itself and lead to overreactions.

The history of the bear market

Bear markets have existed as long as stock exchanges. From the Second World War to today, the S&P 500 has known thirteen bear markets. Well-known examples are the Great Depression during the 1930s, the dot-com crisis of the 90s and the financial crisis of 2008.

2022 was also dominated by a bear market. On 13 June, the S&P 500 officially entered this phase after the index had lost more than 21% in value. The Nasdaq fared even worse with a decline of more than 30%.

How does a bear market come about?

A bear market rarely arises from a single cause. Usually, it involves a combination of factors. Take a look:

1. Economic recession

A recession means that the economy is temporarily experiencing negative growth. You speak of a recession if the gross domestic product (GDP) shrinks for two consecutive quarters. If growth slows down, profits for companies fall and stocks become less attractive.

2. Inflation

Due to inflation, you can buy less with the same amount of money than before; in other words, the purchasing power of your money decreases and the currency becomes less valuable. Purchasing power falls and central banks raise interest rates to combat inflation. This slows down the economy.

3. Geopolitical uncertainty

A war, trade conflict or global crisis causes geopolitical uncertainty. Investors prefer to sell their stocks rather than buy them. At such moments, safety takes precedence over growth.

4. Bursting bubbles

When prices have risen faster for years than the actual value of companies justifies (overvaluation), this leads to a bursting bubble. A small correction can lead to a massive sell-off.

How long does a bear market last?

A frequently asked question is how long a bear market lasts. The short answer: it varies. According to historical research by Newfound Research, bear markets last an average of about 13 to 18 months, or around 1.5 years, with a loss of 35%.

Some bear markets last only a few months, others can last years. The longest bear market in the United States lasted just under three years. In Japan, however, the bear market lasted more than twenty years around the turn of the century. No one can predict exactly when a bear market begins or ends, and even experienced investors rarely manage to time it.

The characteristics of a bear market

You can recognise a bear market by several clear signs:

• Sustained falling stock prices: The stock prices fall over a longer period, often by at least 20% from the most recent peak.
• Predominantly negative market sentiment: Confidence among investors decreases, causing fear and pessimism to prevail.
• Higher volatility: Prices move more violently than normal, with sharp fluctuations from day to day.
• Risk-averse behaviour among investors: Investors take less risk, sell their positions more often and seek safety.
• Economic bad news: Negative reports about economic growth, corporate profits and employment.

How often does a bear market occur?

On average, you see a bear market on the stock exchange once every three and a half to five years. Market corrections occur more often and historically last an average of three to four months. Most corrections, however, do not lead to a bear market. Yet both are part of investing and the natural movements of the market.

Bull market vs. bear market

A bull market and a bear market are opposites. The terms bull and bear both describe the sentiment on the market. You can find the difference in the table below.

What does a bear market mean for investors?

For investors, a bear market means that the value of your current investments can fall. An unpleasant thought, but the best advice is to keep a cool head as an investor. A fixed plan and a well-diversified portfolio often work better in the long term than reacting to the news of the day or timing the market. Investing is for the long term, where you invest in the goals of your future self in ten, fifteen or twenty years.

A bear market also offers opportunities. Stocks of strong companies are generally relatively cheap, with a chance that they will grow again. Investors buy stocks when prices fall to profit when prices rise again later. You can read more about it on our page ‘Bear markets: What you can do during falling stock prices’.

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All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.