What is a bear market? A beginner guide to the basics

What is a bear market?

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).

Leon Turkin, financial expert and mortgage broker at Turkin Mortgage, explains bear markets like this. “Assume you've been collecting baseball cards or Pokémon cards for some time. Then suddenly, people don't seem to be that interested anymore, prices begin to fall — perhaps in a very big way,” says Turkin. “That is kind of the same thing that happens in a bear market, except instead of cards that get devalued, it is stocks and investments.”

What’s the difference between bull markets vs. bear markets?

In simple terms, bull markets rise, while bear markets decline. 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.

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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% (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.

Pro tip: If you’re curious about the origins of where these financial terms came from, read more about the bulls and the bears.

The history of bear markets

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.

1. The Great Depression. This 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%. 

2. The Great Recession. 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% in the short term. Despite the drop, the market fully recovered and set new record highs and good times for all investors. 

3. The COVID-19 pandemic. 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.

What causes a bear market?

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.

"Bear markets get triggered when confidence vanishes,” says Angelo Crocco, owner of AC Accounting. “Could be inflation, job loss fears, or the market finally catching up to bad news that’s been brewing under the surface. When people stop believing tomorrow will be better, prices drop. That belief shift is the real driver — not just charts."

6 tips to consider when investing in a bear market

Your investing strategy depends on your financial goals, risk tolerance and your willingness to be patient — 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.

1. Look for bargains. 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.

2. Spread out your investments. Maintaining a diverse portfolio can help 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. 

3. Mix it up.  A diverse portfolio has stocks from different industries and different types of investments like bonds and ETFs.

4. Stay the course. 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.

5. Think long term. 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.

6. Try dollar-cost averaging. This smart strategy is when you invest 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.

Turkin has some advice to consider when investing during a bear market. “I always tell families — especially parents teaching kids about money — that trying to time the market is the same as trying to catch a falling knife or predict the exact moment the rain will stop,” he says. “It is almost impossible to do so consistently, and it often leads to poor decisions such as selling low and buying high. What works better is to stick to the plan and invest, especially through automated contributions like a monthly investment plan.”

FAQs about bear markets

Q: Does a bear market mean recession?

Not always. A bear market is when stock prices drop 20% or more, but that doesn’t automatically mean we’re in a recession. The two can happen at the same time, but one doesn’t always cause the other.

Q: Is a bear market good or bad?

It depends on how you look at it. Bear markets can feel unsettling because prices are dropping, but they’re also a normal part of how the market works. Over time, the market has always bounced back, and learning how to stay calm during the dips is an important part of investing.

Q: How long does a bear market last?

Sources differ, with Kiplinger noting that the average bear market length is about nine-and-a-half months while Charles Schwab gives a longer average of about 409 days, or a little over a year. Phew! That’s not too long if you ask us. According to Seeking Alpha, there have been 28 bear markets since 1928, with an average decline of 35.63%.

Q: Which stocks perform better during a bear market?

Typically, companies that sell essentials (groceries, household goods, healthcare) usually tend to perform better because people still need those things no matter what the market’s doing. These are sometimes called “defensive stocks.”

Q: Should I wait for a bear market to invest?

Trying to time the market is tricky (and stressful!). A smarter move might be to invest consistently over time so you’re buying during both the highs and the lows.

Learn about investing and inflation with Greenlight

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.

So, if you’re ready to stock up on more money topics, download Greenlight for more financial literacy content. Stick with us, and you’ll be a money pro in no time!

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