A bear market is a stock market situation in which the majority of financial assets are in a downtrend.
If we refer to a bear market, we are talking about a joint situation. In addition to being a situation that occurs in the set of financial assets, it usually takes place over a long period of time. It can last from a few months to several years.
Still, it is worth noting that bear markets tend to have a shorter duration than bull markets. And, at the same time, they tend to be more abrupt movements (with more volatility). Consequently, it is a situation in which the majority of financial assets fall or move downwards.
To facilitate the explanation we will make a breakdown of the definition:
- It is a stock market situation since it occurs in the stock market in a generalized way.
- Most financial assets move in one direction.
- The direction they take is bearish. When we refer to the bearish term, we are saying that they fall, that their price falls. For example, when a stock falls, it is moving lower. And, in this sense, when it moves down for a long time, we say that it is in a downtrend.
That said, when most financial assets are in a downtrend, we will say that we are facing a bear market.
Characteristics of a bear market
Bear markets have always existed. As long as bull markets last, bear markets always appear. The stock market moves cyclically, rising during certain periods (bull market) and falling during other periods (bear market). In the following, the characteristics of a bear market are detailed:
- Most assets are in a downtrend.
- This is usually associated with an economic situation of recession or economic slowdown in which the gross domestic product (GDP) falls and unemployment increases.
- It is a part of the stock market cycle. Even so, within a bear market there are different sub-phases.
- Bear markets tend to be shorter in duration than bull markets.
- Finally, although they are shorter, they tend to be more volatile. Which means that the movements are more abrupt than in bull markets.
As a point, we have to bear in mind that there is the possibility (and in fact it does) that there are financial assets that rise in bear markets. It usually happens that most financial assets move down, but there may be assets that are not affected by the bad economic situation and that the price rises. For example, it is not uncommon for gold (a safe haven) to increase in price in a bear market.
It is also interesting to note that a bear market can occur in different geographical areas and different sets of assets. Thus, we could speak of a bear market in bonds, stocks or even in raw materials. Although it is true, everything is said, that when we speak of a bear market or a bull market, we usually refer to the stock market.
How long does a bear market last?
Nobody knows how long a bear market lasts. Throughout the history of the stock market, bear markets have followed one another. Some, like the one that had its origin in the crash of 29, had very sharp falls with numerous bankruptcies. Others, however, were shorter and only lasted months.
We do not know the magnitude or the duration, so trying to guess when a bear market will start or end is quite complicated, if not impossible. We can analyze a market and study if the probabilities that a bear market will end are higher or lower, but uncertainty is something inherent in the stock market.
That said, it is often said that a bear market lasts, on average, between 3 and 18 months.
Bear market example
An example of a bear market could be the one that happened in the S&P 500 between 2007 and 2009.
The S&P 500 represents the 500 largest capitalization companies in the United States. So although there were values that rose, most of them fell. Therefore, one way to see if the American stock market is bullish or bearish is to see the behavior of this index.