Bear Market 101: What Investors Need to Know
You’ve probably heard the phrases “bull market” and “bear market” used to describe the stock market before. But what, exactly, do they mean and how do they impact your investment decisions?
Let’s take a look.
What Is a Bear Market?
The status of the stock market is typically referred to in one of two ways: either as a bear market or a bull market.
A bull market refers to periods of growth. Stock prices are rising, investor sentiment is primarily positive, gross domestic product (GDP) and corporate profits are increasing, and unemployment numbers are low.
By comparison, a bear market refers to periods of sustained market downturn that last for at least two months. Stock prices are dropping, investor sentiment is negative, unemployment may be on the rise, and GDP is declining.
Economists define a bear market as a prolonged period of declining prices. A bear market typically begins with a 20% or more fall in broad market indices, such as the Dow Jones Industrial Average (DJIA) or S&P 500.
For example, the onset of Covid-19 launched the U.S. into a bear market when the DJIA closed at 23,553.22 points on March 11 — a 20.3% drop from its former high on February 12.1
How Often Do Bear Markets Occur?
Bear markets are part of the natural economic cycle, which means they’re inevitable — but they’re also typically not long-lasting. In fact, compared to bull markets, they historically are relatively short periods of time.
It’s common for bear markets to precede, or sometimes coincide with, a recession.
However, if we look at the history of stock markets, bear markets tend to last less than a year, or about 363 days on average. By comparison, a bull market lasts 1,742 days on average, or a little over four and a half years.1
In terms of frequency, bear markets have historically occurred every 3.5 years on average. Though it is worth noting that prior to March 2020, we experienced our longest bull market in history — which was just shy of 11 years.1
What Happens During a Bear Market?
The status of the market relies heavily on investor sentiment. Like a snowball rolling down a mountain, poor investor sentiment often gains traction as it continues impacting stock prices and values. The more prices drop, the worse investors feel about the market. Once the market has been pushed into a bear market, it can be challenging for investors to regain a positive outlook. But eventually, the tides turn, and investor confidence grows.
As we mentioned earlier, a bear market often parallels a declining economy. The greater economic outlook tends to be pessimistic when a bear market occurs, which may be reflected in a sluggish labor market, rising inflation, and higher interest rates.
Should You Invest During a Bear Market?
Bear markets can be scary for investors, especially investors who are new to the markets or not working with a financial professional. But as history has indicated, they don’t tend to stick around for too long.
Here are a few considerations to keep in mind when investing during a bear market.
Diversify
Diversification should always be a key component of your investing strategy, including during a bear market. By spreading your investments both globally and across multiple asset classes, you’re helping your portfolio offset losses in one area with potential gains in another.
If you’re doing this yourself, you may choose to invest in an index fund, for example. But everyone’s tolerance for risk and goals are different, so it’s important to find a balance that works best for you. A financial advisor can help you accomplish this.
Avoid Timing the Markets
Simply put, timing the markets is a gamble that doesn’t pay off often, on average (even for the professionals). It’s unreasonable to think you, or any professional or investor, can predict the “bottom” price.
However, if you are looking to take advantage of price drops, there is another strategy you could implement instead.
Think of a bear market as a period where stocks “go on sale.” Identify stocks that you’re interested in holding long-term and that align with your greater goals. By investing during a downturn, you’re keeping a long-term focus on your investments while getting in at a better price.
Maintain a Long-Term Focus
Whether the market is bullish or bearish, try to keep the focus on your own long-term goals. Investor sentiment may be negative currently, but it’s possible this market downturn could be followed by a booming recovery. No one can predict the immediate future of the markets, but it’s helpful to put things in perspective. Over the long-term, the markets trend upward — even though the day-to-day or month-to-month fluctuation can be unsettling to watch.
If you pull your money out earlier than anticipated because of a bear market, you’re essentially locking in your losses instead of giving your money the opportunity to recover.
How a Financial Advisor Can Help
Working with a financial advisor is one of the most effective ways to stay disciplined during a bear market. They can help you make decisions that are focused on your long-term goals, rather than impulsive reactions to current conditions. In other words, an advisor is there to help you stay the course.
If you’re nearing or in retirement, it’s possible you may not have time on your side to ride out a bear market. In this case, your advisor can help reassess your asset allocations and adjust as needed to protect your portfolio.
Interested in working with a financial advisor? We’re here to help you stay calm and confident in your financial plan during all economic environments. Feel free to reach out to us to learn more.
