Bear market meaning
The common definition of a bear market is when the price of an asset has fallen by approximately 20% or more from recent highs. Although it can affect things like real estate, foreign currencies and crypto, this term is mostly associated with the stock market.
Let’s take the Dow Jones Industrial Average, a stock market index that measures the value of 30 big US companies, as an example. It finished June 25 2019 at 26,548. If the index subsequently fell to 21,238, this could be classed as the beginnings of a bear market.
Generally, bear markets are dominated by low investor confidence and pessimism about the state of the economy – potentially because of low employment levels or global trade disputes. Prices fall because investors decide to pull out of the market and sell their assets in fear of incurring further losses.
How long do they last?
In the U.S., bear markets last for about 14 months on average. In this climate, S&P 500 index – which tracks the value of the 500 biggest companies listed on US stock exchanges – typically loses about 33% of its value. The most bruising incident came about a decade ago, when almost 57% was wiped off the value of the S&P 500 when a mortgage crisis sparked a credit crunch.
The opposite of a bear market is a bull market, and this is where prices rise by 20% from recent lows and continue heading in an upwards direction for a prolonged period.
While bear markets can be challenging for investors, there can be bright spots among the doom and gloom. Individual stocks can buck the trend and continue to rise. Conversely, when stock markets are performing well, it is possible for the share prices of individual companies to enter “bearish” territory and fall sharply even if other corporations in an index have been performing well.
Bumps in the road are common for foreign currencies and stock markets, but not every dip amounts to bear territory. Corrections can see prices fall by about 10% from recent highs, and these short-term blips often occur when the prices of overvalued assets are adjusted to take heat out of the market.