Lions, and tigers, and bears, oh my! When it comes to the financial markets, there are plenty of wild terms out there to understand, and we don’t just mean the animals. As with most industries, the world built around the financial institution comes with its own language.
To better understand what these creatures mean in terms of green, let’s break down some of the vocabulary, giving you a better understanding of the jargon.
Bear Markets Defined
There are two main animals referenced by financial advisors. They include the bear and the bull. If you’ve ever visited New York’s Wall Street, you may have seen a statute called “Charging Bull.” Also referred to as the Bull of Wall Street, or the Bowling Green Bull, this bronze statue sits on Broadway, just north of Bowling Green, in what is known as New York’s “Financial District.”
This bold piece of art isn’t just there for aesthetic purposes. It has a meaning in that area. The bull is a term used for the state in which most prefer the market to exist. It is in a state of rising prices, or those that are on the upswing.
Bears in the Stock Market
In its simplest terms, a bear market describes the stock market when prices are falling. It can refer to the entire stock market, a specific country, or even a specific stock.
In slightly more technical terms, a bear stock (or bear market) is one that has dropped 20 percent or more in recent history. If a stock was trading for the last several weeks at $1, for instance, and now is trending all this week at $0.80, it could be considered a bear stock. If the entire market was trending this way, it would be a bear market.
The Perception of Bears
While this all sounds like a lovely math problem, the concept behind the “bear market” goes much deeper. After all, the entire market of stocks is based on perception. And, when things are in a “Bear” state, there is a negative perception of the financial state of the world.
Bear markets tend to come with worry. Investors begin to think that the market is risky. Prices are falling, and falling stock prices mean a falling faith in the market.
There is low investor confidence during times of a bear market. Those trading will often slow or stop buying. There will be an overall conservative vibe across the market.
Bears in the Economy
A bear market is also a time of uncertainty. It is typically marked by periods of higher unemployment and a slowing economy.
Due to these fears, investors begin to sell. It becomes a “seller’s market” as stocks are being sold off in exchange for the safety of cash or fixed-income securities.
People don’t want to risk their funds, so the market becomes quiet.
Bear Markets and Stock Prices
If stock prices fall, and the trend continues, a stock market can experience a bear market. The length of time does not have to hit a required amount to consider the downturn of a bear market.
These downturns can be to particular stocks, an industry, or an overall market as a whole. In bear markets, the price of stocks is receding and most stocks are declining in value.
Bear Market vs. Bull Market
The opposite direction of a bear market is a bull market. A bull market is when prices are rising. A bull market is typically a sign of high investor confidence and a strong economy. There is less economic uncertainty, and people are generally more comfortable with investment prices.
A bull market is the preferred state of markets in terms of the public at large. Investing or not, the bull markets over time show improved economic health for all. A bull market often has low unemployment. Bull and bear markets impact far more than the average stockholder or investors.
Bears and Recessions and Depressions
A bear market does not have to mean recession. Because there are no predetermined dates that define bear markets, it can be confusing to some.
However, in the event of a recession, investors will see a prolonged bear market with which falling stock prices are seen across major market indexes. A recession by definition is a period over several months where the economy shrinks instead of growing.
While bear and bull markets occur frequently, recessions are typically denoted by longer time periods of time. When a recession (or very, very lengthy bear market) is experienced over several quarters or years, it is then considered a depression.
Depression is a more severe downturn and typically can last several months or years. To make it easiest in your head a long-term bear market would turn into a recession, and long recessions can turn into depressions.
The different definitions are largely outlined by the sustained period of the downturn.
Bear Market Stats
There are plenty of facts and figures when it comes to stocks. Prices fall. Prices rise. The art of watching those trends is a fast-paced and ever-changing environment, and those that master the skills are paid handsomely for it.
The Most Recent Bear Market
Bear markets have occurred often in recent decades. The last bear market happened when the COVID-19 pandemic began. From Feb. 19, 2020, to March 23, 2020, a bear market lasted 33 days. Over that time, spanning just over a month, the market went down 35.62 percent.
While the sustained period of time was short, the impact was great. There was a worldwide fear as a pandemic of this proportion had not been seen in quite some time. This fear spread to the financial world, causing a financial crisis.
Thankfully, with the ability for many to work from home, precautions slowed the spread, and the economy reflected the upturn quickly. While we remained in bear territory for over a month, the lower prices did not cause money to be lost too quickly from stocks.
The Typical Bear Market
Based on historic statistics, the average length of a bear market is 289 days. Bull markets average 991 days.
There is an average of 3.6 years seen between bear market occurrences. These are, of course, not hard and fast rules, but the typical trends seen over the history of the stock exchange-traded funds.
A recession, however, a more widespread and longer-term economic decline, can last for several months, while depression is an even more severe downturn that lasts for years.
There have been 33 recessions since 1854. Since 1945, recessions have lasted for an average of 11 months each.
There’s been only one, true depression, known as the Great Depression. It lasted 10 years. According to the National Bureau of Economic Analysis, it was actually a combination of two recessions felt back-to-back.
The first lasted for 43 total months, from August 1929 to March 1933. The next lasted 13 months, from May 1937 to June 1938. Combined, the severe downturn lasted for around one full decade.
The Longest Bull Market
The longest bear market in history lasted 61 months. In total, it spanned from Nov. 9, 1940, to April 28, 1942, which was a total of 535 days.
This was one of several bear markets that happened leading up to and going through a world conflict: World War II. It is common in times of war, no matter where they are and the players involved, for the economy to feel the impact.
The Dot Com Bubble
We’d be remiss to not discuss the stats of one of the craziest times in the market in recent history. From the late 90s, as the Internet became a new and booming business, so too did the stocks that backed those companies.
The “bubble” of the dot com era was the rather artificial inflation that this caused. The investment decisions went off the grid. Investors thought that the space could never fail, and profits were pouring in. Corporate profits were major, and so too were the investors’ pockets.
Between 1995 and a peak in March 2000, the Nasdaq Composite stock market index rose 400 percent, only to fall 78 percent from its peak by October 2002. This drop meant giving up all gains seen during the bubble.
During the crash, a plummeting bear market, many online shopping companies, shut down. Some that survived, like Amazon.com, lost large portions of their market capitalization, with Cisco Systems alone, for example, losing 86 percent of its overall stock value.
Investing in a Bear Market
There are, of course, countless tips and tricks that everyone from your hairdresser to your 401(k) investors will provide you, especially in tough times. During a bear market, your investment strategy should alter somewhat, depending on the length of your investments, your end goals, and overall funds involved.
The Long Haul
Investments are typically best left in the market for long periods of time. While the trends may come and go, with bear and bull market values changing month-to-month, or year-to-year, it is often best to invest long-term and develop a “wait and see” attitude about future results.
Those who panic sell during a bear market, or opt to dump a stock in the bull market assuming the price will never get higher, can often miss out on long-term gains favoring near future results.
Financial decisions are best left to watching the markets over longer periods of time. As we’ve noted in our stats, bear markets often come and go. It is the investment decisions you make over time that will boost your profit.
Everyone should, however, consider (or consult with professional financial advisory services) at what point they cannot withstand more loss. Your “risk tolerance” will determine how far you are willing to go.
Typically, this limit is determined by outlining your overall goals. If you are age 61, on the edge of retirement, seeing a bear market on the horizon is far more worrisome than if you are 24 and just starting your 401(k).
An individual stock will see highs and lows all day long, and building your investment strategies around a stock’s price is not the way to go. Keep an eye on your tolerance limits, and be aware of what the market is doing. But history shows that markets can last several months or even years, but always rebound.
Chances are, by waiting it out, you will see a new bull market. The market recovers. If you are unsure if you should take a chance, it is best to seek the professional advice of brokerage services, instead of going it alone, so you can better understand when to buy or sell stocks.
A Diversified Portfolio
Another strong tip in determining how to invest in a bear market is to be sure that all your money is not sitting in the same basket. In other words, if you are banking your investment decisions strictly on one unique industry, you are limited by the changes in that industry.
If you have high hopes for a particular booming industry, it is OK to invest. However, deciding to put more money in one space may limit growth in another.
Many investors instead opt to operate a diversified portfolio when handling personal finance. Even focusing on the stock index alone is not advisable. Having funds in different options such as mutual funds, IRA, CDs, and even cryptocurrency can give you options.
This way, as a bear market occurs, you will see a downturn in one investment, but not stress too much as stock prices change day to day. You will have the security of knowing you have options in your investment portfolio and can invest in multiple markets to improve your chance at a successful personal finance package.
Rely on Automation
If even the thought of the stock market approaching bear market territory sends you into a tizzy, it may be time to consider a robot to do the legwork. No, Rosie from The Jetsons is not going to wheel into the rescue (but, that would be cool, right?!).
Instead, the panic of a financial crisis can be muted by a technology called a robo-advisor.
Much like it sounds, the use of an automated investment advisor can be accomplished without a human being. Instead, a robo-advisor makes an easy and affordable way for especially new investors to be hands-off with an investing approach.
Some examples of robo-advisors, like Betterment and Wealthfront, also offer low-cost diversification of your portfolio, and will automatically adjust your investments regularly, known as rebalancing, so you can sit back and know that preprogrammed algorithms are keeping your accounts balanced at all times, no matter the comings and goings of bear markets and bull markets.
Leave Emotions Out
Another wise piece of advice when approaching even bear market territory is to check your emotions at the door. Bear markets come and go. Bull markets come and go. There is always going to be a fluctuation in the stock market. That is the nature of the beast, no matter which animal currently represents it.
But no matter the creature, bull, and bear markets are not forever. Past performances can give you a glimpse of the history of the marketplace as a whole. You can’t just take a few weeks and decide you know all of the ins and outs of the space.
This doesn’t mean you can’t make choices, whether you opt to invest on your own or make investment decisions with a professional. You get to have a voice in your markets of choice. However, you want to remember to keep a level head.
Emotions, especially bears and bulls of the marketplace, can trigger investors to make choices they would not otherwise make.
The Future of Bear Markets
As most investors are aware, the future of the financial industry is always unknown. We can analyze data until our eyes cross, but at the end of the day, anything can happen. Bear markets are not going to go away. But, neither are the bulls.
Bear markets are also not a cause for panic. Overall, the stock market has typically balanced back out and provided a proven method for investing, especially for those in it for the long haul.
Remembering not to panic, to remove emotions, to spread and diversify your funding, and to keep a level head. In the end, ups and downs are going to occur, but there is no need to sell it all or buy over your means.
While it is wise to keep tabs on your investment dollars, it is not a great idea to pull your stocks back and forth from day to day. Investments take time.
While it is important not to fret about daily change, it is not to say you should not stay informed. Even with automated advisory services, professionals on your side, or tools for self-handling of your portfolio there is no reason to just bury your head in the sand.
Instead, stay tuned to the changes in the marketplace. Just don’t react, full of emotion, at the slight inkling of change.