Aug 12, 2022
-A bear market takes place when stocks and major indexes such as the S&P 500 drop by 20% or more. Bear markets are typically accompanied by an economic recession.
-According to recent data, bear markets are short-lived and typically last around nine and a half months.
-Your long-term investing strategy during a bear or bull market doesn’t necessarily have to change, especially if you are dollar-cost averaging.
A bear market takes place when the value of stocks and major indexes, like the S&P 500 Index and Dow Jones Industrial Average, fall 20% or more from a recent high and remain that low for at least two months. A bear market is the opposite of a bull market, which happens when stock prices rise for a consistent period of time.
A bear market represents a downward trend in the stock market. It can sometimes accompany an economic recession, which happens when there’s a decline in two or more consecutive quarters in the economy’s output or gross domestic product (GDP).
What’s the difference between a bull and bear market? Think about it this way — when bulls charge, they start with their horns low and raise them upwards. When bears charge, they rear up with their back legs and then come down. In simple terms, bull markets rise, while bear markets decline.
Pro tip: If you’re curious about the origins of where these financial terms came from, read more about bulls and bears here.
While a bear market occurs when stocks and major indexes are on a decline, a bull market occurs when the opposite happens. Bull markets take place when major stock indexes increase by 20 percent (or more) and continue to grow. Bull markets represent a healthy economy, while bear markets typically fall hand-in-hand with an economic recession.
Additionally, during a bull market, there is notably more positive engagement among investors. On the other hand, during a bear market, many investors’ sentiment is negative and fearful. However, is there enough reason to panic? Let’s find out.
There are many economic factors that can cause a bear market including the inflation rate, interest rates and unemployment rates. The market sentiment (investors’ expectations of the market’s future performance) can also factor into these underlying causes.
According to Seeking Alpha, there have been 28 bear markets since 1928, with an average decline of 35.62%. The average bear market length of time was 289 days or roughly nine-and-a-half months. Phew! That’s not too long if you ask us.
It’s possible that a bear market can reverse the stock market gains made during the previous bull run. However, historically, the stock market has always recovered and continued to climb to new highs in the long run.
Let’s visit three of the most notable bear markets in American history — and learn what happened after.
The Great Depression was the worst economic event in American history. It lasted from 1929 to 1939. A total of 120 months. The stock market crashed in 1929 — the Dow Jones index dropped by 25%, and the S&P 500 index fell by 83.4%.
In December 2007, the Great Recession began and lasted until mid-2009. This bear market lasted a little over one year, but the S&P 500 index plunged 50.9 percent in the short term. Despite the drop, the market fully recovered and set new record highs and good times for all investors.
In February 2020, as the Covid-19 pandemic was starting — the American economy entered a bear market. On average market prices dropped 33%. However, it only lasted 33 days. By April 2020, stock markets globally re-entered a bull market and in 2021 the S&P 500 saw a 26% return.
“The stock market is designed to transfer money from the active to the patient.” - Warren Buffett
Your investing strategy depends on your financial goals, risk tolerance and your willingness to be patient. Although the economy has recently entered a bear market, it’s important to stay calm and think long-term.
If you plan on investing during a bear market, consider these financial tips to help you navigate the market.
A bear market can be a great time to buy strong stocks or index funds at a low price. Buying stocks at a lower price may help you gain profits if prices go up again, which — spoiler alert — in aggregate, always have in the past.
Maintain a diverse portfolio to reduce risk. Why? Spreading your money around in different investments means that if one doesn't perform well, you don't have to worry about losing all your money.
Remember — a diverse portfolio has stocks from different industries and different types of investments like bonds and ETFs.
During a bear market, many people assume stock prices will keep going down, and they sell all their stocks. However, if you follow smart investing strategies, like consistently investing for the long-term, the type of market won’t matter. That’s because if you sell a good investment while it’s temporarily going down, you’ll report a loss. But, if you sell at a high price (when the market is on the rise), you’ll make a profit.
Remember that bear markets are typically shorter than bull markets. And if you’re investing for the long term, you can take a breath because historically they’ve always recovered.
One smart investing strategy you can consider following is dollar-cost averaging. Dollar-cost averaging is investing a consistent amount on a regular basis, regardless of the share price. Investors use this strategy to develop good investing habits and become disciplined — instead of panicking over the market’s performance.
Let’s talk about a real-life example of dollar-cost-averaging. Meet Sam — Sam started investing in 2000, back when she was 18 years old. Despite the Great Recession and Covid-19 pandemic, Sam consistently invested $100 into the S&P 500 each month.
Today, Sam is 40 — and she’s weathered two major market crashes. But, at the beginning of 2022, Sam reported a total investment balance of $37,213! Woah. That's around a 15% return on her investments.
Thinking long-term is so important when it comes to your finances. And being prepared for the short-term is just as important. So what can you do while the economy is in a bear market?
It’s impossible to predict when a bear market will start or end, but — friendly reminder — the stock market has fully recovered each time. And that’s not all we can help you understand. We’re talking all things investing and inflation in our money and investing app for kids, teens and parents.
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