What is a Bear Market?
What is considered a bear market? A bear market is a situation in the financial market where the prices of stocks or other assets are experiencing prolonged declines.
For a bear market to form, the theory suggests that the asset price should drop by more than 20% from its recent highs.
Bear markets indicate the prevalence of investors with pessimistic views. Bear markets can occur in various asset classes, including stocks, bonds, commodities, FX, and more.
When a bear market occurs in the stock market (S&P 500), then this usually is an indication of a recession, economic instabilities, and lack of investor confidence. Investors don't fancy seeing a bear market on the horizon.
As noted in the Raging Bull Trading reviews, some stock picking and educational programs focus on bear market strategies.
There are two main types of bear markets - cyclical and longer-term. While the former can last for several weeks or a few months, the latter can last for years.
Top 3 Bear Markets
Historically speaking, bull markets are significantly outnumbering the bear ones. However, if you ask any investor about the most pivotal events in the history of the stock market, he will most likely focus on bear markets. Here is a list of the top 3 bear markets in history:
September 1929 - June 1932
- Duration: 34 months
- Loss: 86.1%
There is no doubt which is the biggest and most famous bear market in the world's history. Even non-financial people have heard about the Great Depression of October 29, 1929.
The downturn lasted almost three years, during which the S&P 500 fell 86%. The crash left its scars as the market couldn't regain its pre-crisis peak until 1954.
Several factors caused the Great Depression. Among them is the insufficient demand from the private sector, the lack of fiscal spending, the reduction in the money supply, which led to a banking crisis, and the reduction of credit, which caused a series of corporate bankruptcies.
All these, combined and taking place at the same time, resulted in the biggest market crash in the world's history.
The implications of the Great Depression were staggering. Some countries couldn't overcome the negative effects of the economic downturn until WWII. Personal income, profits, and stock prices dropped by up to 50% worldwide. The US unemployment hit 23%, while in other countries, it exceeded 33%.
To get a sense of how devastating the Great Depression was for the market, think about the following fact – it resulted in a 15% drop in the GDP worldwide. For example, the most recent bear market, referred to as the Financial Crisis of 2008 (or the Great Recession), resulted in a 1% drop in the GDP.
March 2000 - October 2002
- Duration: 30 months
- Loss: 49.1%
Just three months into the new century, we witnessed one of the most severe bull markets in our history. The so-called Dot-Com bubble that burst in March 2000 unfolded a crisis that led to a 49.1% drop in the S&P 500 and bankrupted a number of investors. The bull market ended a period of overly-optimistic investor sentiments towards tech stocks.
It all started in the late 1990s with an exponential boom in the investments in tech companies. From 1990 to 2000, the tech-dominated NASDAQ index rose from 1 000 to 5 000.
Close to 40% of all venture capital investments were going to the Internet industry. The beginning of the new century was marked by soaring stock prices and increased speculation with the potential of Internet giants. Investors started tipping every company that had anything to do with the Internet or digital services to be the next Microsoft.
Even small companies with little-to-none profits had market valuation exceeding the one of established international corporations.
However, by the end of 2001, the majority of these companies had gone bust. The market still carried on momentum, which lasted for another year, but eventually, everything came to an end.
The crash was so severe that it made the share prices of tech giants like Cisco, Intel, and Oracle plummet, and the companies lost over 80% of their value. The NASDAQ index took over 15 years to regain its pre-crisis peak.
October 2007 - March 2009
- Duration:17 months
- Loss: 56.4%
Although lasting less than a year and a half, this bear market was one of the most significant in our history. It happened just over a decade ago and resulted in freefall for almost all indices, including Dow Jones, Nasdaq, as well as the S&P 500, which nosedived 56.4%.
The crisis, which was later on branded as "The Great Recession" was a result of a housing bubble that had been forming in the US for years. Individuals with basically no job, collateral, income, or with bad credit history could all get a mortgage.
On the other hand, the banks were collecting those mortgages in pools and selling them as complex investment schemes, known as credit default swaps (CDS).
The stock market crash led to massive collapses for leading banks and financial institutions like Lehmann Brothers and Bear Sterns. The FED's immediate reaction saved others, including AIG, Freddie Mac, Fannie Mae, and a few banks from having the same fate.
A program of quantitative easing (QE) and central bank interventions started taking place all around the world. The crisis resulted in the introduction of regulatory and oversight measures intended to protect individuals and the systemically important financial institutions (SIFIs).
The Financial Crisis of 2008 and the following bear market decreased the global GDP by 1% on average. However, it also set the stage for one of the biggest bull markets in our history.
What is the difference between a bull and a bear market?
During a bearish market, the prices of the assets move in a downward direction. During a bull market, on the other hand, there is an increase in stock prices. Or in other words; a bull market marks a positive movement, while a bear market marks a negative one.
Investors have named the bull and the bear market after the way both animals attack. While the bull attacks with its horns upward, the bear attacks with its claw moving down.
During a bear market it is also helpful to consider alternative investments like gold and silver and gold.