What Is a Bear Market? Here’s an Overview, the Causes, and Consequences

What Is a Bear Market? Here’s an Overview, the Causes, and Consequences
Point Editorial

The term "bear market" refers to when the market suffers from continual price declines, typically more than 20 percent. A widespread phenomenon that often occurs during economic recessions, a bear market can last from a few months to several years and send investors spiraling into pessimistic fits of the financial blues.

The opposite of a bear market is a bull market, which describes a prolonged, ongoing rise in market prices. 

Read on to learn more about bear markets, their different phases, how they differ from bull markets, and how they can affect you financially. 

Phases of a bear market

Generally speaking, a bear market has four stages:

Stage 1: High prices and investor sentiment characterize the first stage of a bear market. Once prices start dropping, however, investors tend to cash in on their stocks and assets, and they refrain from funneling their funds back into the market until the situation improves.

Stage 2: Prices fall rapidly in the second stage of a bear market. Trading comes to a halt, and companies quickly lose profits. A sharp decline in market activity defines this stage. Investor faith decreases as well, and many scramble to sell their shares. 

Stage 3: People start to re-enter the market. As a result, stock prices take a turn for the better once again, and trade increases. 

Stage 4: Stock prices gradually drop back down to a reasonable level, becoming more affordable. Typically, bull markets come after this fourth stage. 

Why do bear markets occur?

Bear markets happen when stock prices drop for an extended period. Stocks are dynamic and constantly in flux, but frequent market lows lead to fewer investments since investors don't want to risk losing their money. 

Struggling businesses are one of the most telling signs of a bear market, and unemployment rates start to rise as a result. 

Changes in the allocation of federal funds can also lead to the creation of a bear market. 

A bear market can fall into two categories, depending on how long it persists. The first is a cyclical bear market, which continues for a few weeks to a few months. In comparison, a secular bear market lasts 10–20 years. Since World War II, Wall Street has experienced 13 bear markets, each of which lasted for approximately a year. 

What should you do during a bear market?

Here are some helpful strategies to help you navigate your investments during a bear market:

Tip 1: Don't act out of fear. Panicking during an economic recession may be an understandable reaction, but it's the worst thing you can do. As much as you'll want to, refrain from withdrawing all your investments. Otherwise, you'll lose more in the long run. Remember, they'll bounce back once this period is over. It's better to talk to an expert about your options than to act hastily. 

One tool to keep in mind in the face of a bear market is Point Card. A safe, accessible alternative to traditional credit cards, Point Card is a means for you to spend your own money without the fear of borrowing someone else's. As a Point cardholder, you're eligible for fraud protection with zero liability, no interest fees, and unlimited cash-back on all purchases. You'll also receive bonus cash-back on subscriptions, food delivery, rideshare services, rental car and phone insurance, and coffee shops. So, regardless of the stock market's current conditions, you'll have peace of mind knowing Point has your back. 

Tip 2: Focus on the long run. Bear markets are uncertain periods, but they're a natural part of the economy. They don't last forever. 

Tip 3: Protect your "four walls." Specifically, this refers to food, utilities, transportation, and shelter. These necessities should take precedence over other investments until the market straightens out. 

Tip 4: Keep saving for retirement. Though you may be earning fewer returns on your investments during a bear market, continuing to save for the future – no matter how slight the times – is a strategy you shouldn't forgo. 

Bear markets versus bull markets

If pessimism characterizes bear markets, bull markets are periods of economic optimism. 

Bear and bull markets earned their names from how their respective animal namesakes attack their prey. Bears slash downward with their claws, hence the downward decline of stock prices, whereas bulls jerk upward with their horns. 

Bull markets occur when stock prices are high. That usually refers to a 20 percent rise in stock values compared to a bear market's 20 percent decline. 

While both occur naturally economically, bull markets traditionally last longer than bear markets. The average bull market lasts approximately four and a half years, whereas bear markets average less than 10 months.

Three examples of bear markets

In 2007, the housing market fell into a bear market. Real estate stocks plummeted to an unsustainable level, which resulted in foreclosures and defaults that overwhelmed the market. This bear market lasted until 2009.

In 2020, Dow Jones entered a bear market during the global pandemic. Stock profits fell from $30,000 to $19,000. 

Lastly, the most infamous example of a bear market is the Great Depression, when the American stock market collapsed entirely in 1929, resulting in a nationwide recession that persisted for 10 years. 

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