Bear Market

What is a bear market, and what are its characteristics? This and more you’ll learn in this article.

What Is a Bear Market?

A bear market refers to a condition in financial markets where prices are falling, investor confidence and sentiment is extremely negative, and pessimism is widespread. It is typically defined as a decline of 20% or more in one or multiple major stock market indexes like the S&P 500 or Dow Jones Industrial Average from their recent highs. This downturn is considered to be sustained over at least a couple of months as investors sell off equity positions.

Characteristics of a Bear Market

Key characteristics of bear markets include broad price declines across entire markets or sectors, not just specific stocks. There is typically a sustained period of public pessimism, low investor confidence, and expectations of negative economic or financial news. Trading volumes are often higher than average as investors sell positions. Toward the end, there may be a capitulation phase of intense pessimism as investors give up hopes of a rebound.

Measuring Bear Markets

Bear markets are officially measured and defined by looking at major stock indexes like the S&P 500 and seeing if they have declined at least 20% from their most recent highs over a sustained period of at least a couple months. Some analysts also look atmarket breadth indicators like the number of stocks making new highs versus new lows.

Bull Market vs Bear Market

A bear market is considered the opposite of a bull market, which is characterized by rising prices and investor optimism. The two market conditions mark the cyclical downward and upward trends in prices and sentiment in financial markets over time. One transitions to the other after hitting the 20% price decline/gain thresholds.

Causes of Bear Markets

Potential causes that can precipitate a bear market include economic recession, rising unemployment, high inflation, investor panic, bursting asset bubbles, oil shocks, war or geopolitical crises, and central bank policy tightening. Often multiple factors combine to drastically shift investor sentiment from bullish to bearish.

Effects of Bear Markets

During bear markets, investors can experience heavy losses as asset prices decline across their portfolios. For publicly traded companies, bear markets make it very difficult to raise capital and can severely impact growth plans. On a broader level, bear markets in stocks negatively impact consumer confidence, spending, and economic growth.

Signs of an Approaching Bear Market

Some potential warning signs that a bear market could be looming include extended distribution days with heavy volume selling, diminishing market breadth and participation, failure of indexes to reach new highs, and rotation into more defensive stocks. Other signals can include inverted yield curves, rising credit spreads, and deteriorating economic data.

Alexander Voigt, CEO
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Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.