Bear market: This is what it means
If you think a bear market sounds rather scary, you’re already on the right track. In this article, you’ll learn what a bear market is, why it occurs, how it affects your assets and how long it lasts.
9 min read
Thinking about investing your money in stocks, bonds or crypto currencies? Then you might have stumbled upon the term bear market while researching financial lingo. Bear markets are actually quite normal—we counted a dozen or so in the past 80 years. Read on to discover what a bear market is, where it got its name from and why it occurs. You’ll also learn more about the average length as well as the characteristics of a bear market—so you’ll know when it’s coming!
Bear market: definition and etymology
When stock market prices decline for a sustained period and investors are pessimistic about the future, it is considered a bearish market. A bear market then is a situation characterised by declining stock prices and negative market sentiment, with a loss in value of 20% or more within a period of at least two months.
Bear and bull markets
The opposite of a bear market is a bull market, which is characterised by positive stock price development and optimism. So, what’s with all the animals in the stock market? Well, have you ever stood in front of the New York stock exchange or seen it on the news? Then you might have spotted two bronze statues of a bull and a bear in front of it. They represent different trends in the stock market and are internationally used symbols, not only in New York but also Frankfurt and other cities in the world.
While the bull represents a rise in stock prices, the bear symbolises a negative market trend. Why? When a bear attacks its prey such as fish in a river, he swipes his pawns downwards. This movement is used to describe a share price fall. The bull, on the other hand, attacks his prey by thrusting his horns up into the air—that’s why the bull represents a rise.
Alternate terms are baisse and hausse—French terms that have nothing to do with animals. Baisse means decline, and hausse means rise. Both terms are not as commonly used as bull and bear markets, but you might come across them.
What happens in a bear market?
Bears do not only make a dive at their prey, they also look pretty fierce while doing so. This also applies to bear markets in the financial world. If stock prices decline gradually, the feeling or tone of the market becomes rather pessimistic. If investors are scared due to a sustained decline in share prices, they are less likely to invest or even choose to sell their stocks. Their lack of confidence leads to an even more negative market sentiment and in turn, a further share price fall.
As a worst case scenario, this can lead to a total collapse of the stock exchange. One of the most famous examples in history is the collapse of the New York Stock Exchange (NYSE) in 1929, more commonly referred to as “Black Thursday”. In the course of four years, shares experienced a 90% loss in value, and on October 25, 1929 the NYSE finally collapsed. The effects of the sell-off were felt in the whole world, and the US and the former Weimar Republic experienced a major economic crisis. But what are the causes of a bear market?
Why bear markets occur
There are several reasons why bear markets occur, and they can be of political, economic or social nature. Stock market bubbles are one of the major causes, as they tend to burst at some point. This is exactly what happened in 1929: the 1920s were characterised by strong economic growth and positive market sentiment, and more and more people decided to invest in the stock market or take out loans. Now, price fluctuations are a common phenomenon in the stock market, and when stock prices dropped, many people got scared. They sold their shares to access their money, and as a result, share prices continued to drop. This sent out a strong signal to the market: the bubble had burst. People started panicking and tried to sell their stocks as quickly as possible—and that’s when the New York Stock Exchange finally collapsed.
More recent examples are the Dot-com bubble of 2000, the Global Financial Crisis of 2008/2009 and the beginning of the pandemic in 2020. The Financial Crisis started in the US, when more and more people were no longer able to pay off their mortgage—which had been given out far too generously in the first place. The housing market bubble burst, the investment bank Lehman Brothers filed for bankruptcy and stock prices plummeted.
The Dot-com bubble is another example of people betting on the wrong horse. Expecting continued growth of the New Economy, many people decided to invest in internet-based companies, also referred to as Dot-com companies. When growth gradually slowed down and some companies filed for bankruptcy, professional traders sold their shares. Small investors panicked due to the consequent price drop, which led to a rapid share price fall. The overheated market crashed and many new tech-companies lost 80% or more of their stock value.
These are extreme examples of bear markets. Although bear markets are usually paralleled by recession, they don’t always lead to a stock market crash or global financial crises. They often follow periods of economic growth, just like the market goes up again after a period of decline. Low share prices are an incentive for investors to buy, just like many people did shortly after the pandemic hit and many stocks became affordable in early 2020. Bull markets follow bear markets and the other way around, they are interconnected phenomena. This is one of the reasons why you should know the average length and characteristics of bear markets—so you can make the right decision if the worst comes to the worst.
How long do bear markets last?
According to a long-term study by S&P Global Ratings, the average length of a bear market is 14 months. A bull market, in contrast, has an average length of 4.4 years. The time span between the bear market of 2008/2009 and the bear market in 2020 was eleven years. The longest bear markets occurred after the Second Oil Crisis and the Dot-com crisis. They lasted 1.5 years.
When is the next bear market?
With a view to the current inflation and the energy crisis in Europe, fear grows that the next bear market would begin. In Germany, for instance, the German share index (DAX) peaked at 15,000 points in 2021, only to drop to 13,000 shortly after. And according to S&P Global Ratings, the US is already in a bear market. But what are the signs we’re in a bear market or not?
What are the characteristics of a bear market?
The current situation serves as a good example to interpret bear market indicators. The ongoing geopolitical tensions also have an effect on the stock market, and many experts worry about the future. As energy prices continue to rise, small investors want to or have to access their capital and start selling their stocks. While particular stocks even benefit from the current crisis, the overall market sentiment is negative.
The European Central Bank’s (ECB) financial policy aggravated the situation. For many years, the ECB had followed a zero-interest-rate-policy to avoid deflation and stimulate economic growth. Spending money was more sensible than saving it, as banks weren’t able to offer attractive interest rates on their savings accounts. That’s one reason why stocks and ETFs became increasingly popular—they were profitable investments and yielded higher returns. Now the situation has changed: as of September 2022, the ECB has raised the key interest rate twice already in order to fight the current inflation.
However, an interest rate raise sends a negative signal to the stock market. Central banks only raise interest rates to stabilise markets. As a result, investors started worrying and share prices dropped. While a higher interest rate helps alleviate the current rise in consumer prices, it also negatively affects investment readiness of businesses. This in turn increases fear of stagflation and leads to a bearish tendency in the market. Higher interest rates make instant access savings accounts more attractive, which is another reason why people choose to sell their stocks and invest their money with a bank.
There are also different ways to calculate whether we’re in a bear market. According to experts, the negative share price development must last for at least two months. The 2-percent-rule says the loss must be at least 2% each month, between the last peak in a bull market and the last low in a bear market. And according to the two-thirds-one-thirds rule, two thirds of the total stock price loss occurs in the last third of the bear market period. If these criteria aren’t met, experts consider the price loss a market correction. Short-term losses are actually a good thing, as they help prevent the market from overheating and prolong bull markets. As a rule of thumb, experts therefore advise to hold on to stocks in the first three months of a negative market trend.
Crypto bear markets
Another interesting example is the crypto market. Ethereum and Co. long seemed like a safe bet for short-term investments, which is why many people preferred buying crypto currencies over stocks. Since 2021, the market sentiment has changed and high expectations have gone out of the window. Even though the crypto exchange is based on different rules than the stock exchange, it can’t escape external influences and market bubbles.
The Bitcoin bear market and its effects
Bitcoin peaked at about €60,000—which is quite an accomplishment for a new digital currency that first entered the scene in 2009. However, Bitcoin has lost about two thirds of its value since then. In September 2022, it was worth about €19,800. Although its loss in value slowed down gradually, experts consider this a crypto bear market rather than a market correction.
Since Bitcoin, many more cryptocurrencies have been created. You can look at Bitcoin as a key currency, and its recent price drop was followed by that of other currencies. It seems like we’re currently in a crypto bear market, though we can’t be certain the crypto bubble has really burst. In any case, you know now that bear markets usually don’t last long and are followed by bull markets—which might give you some peace of mind.
Want to learn more about economics and finance? Visit our blog to discover more articles on related topics such as hyperinflation or the pros and cons of crypto currencies. Also check out our guide to starting your personal financial planning today.
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