A bear market is when the price of an investment falls at least 20% or more from its 52-week high. For example, when the Dow Jones Industrial Average fell to 23,553.22 on March 11, 2020, we entered a bear market, because that was more than 20% lower than the Dow’s most recent 52-week high of 29,551.42.
Bear markets can occur in any asset class. In stocks, a bear market is typically measured by an index like the Dow, the S&P 500, or the NASDAQ Composite. In bonds, a bear market can occur in U.S. Treasuries, municipal bonds, or corporate bonds. Bear markets also happen with currencies, gold, and commodities such as oil. They don’t, however, apply to consumer prices. When those fall, it’s called deflation
A ferocious bear market can wipe out years of hard-won gains made in a bull market. That’s why it’s important not to get overzealous about pull back in bear market and develop a habit of taking profits on a regular basis in shorter timeframe.
How to Recognize a Bear Market? There are variations on the definition of a bear market, and some say it’s a 20% drop from a “recent high,” or are even less specific. According to the U.S. Securities and Exchange Commission, a bear market occurs when a broad market index falls by 20% or more over at least a two-month period.The average length of a bear market is 367 days. Conventional wisdom says it usually lasts 18 months. Between 1900 and 2008, bear markets occurred 32 times with an average duration of 367 days. They happened once every three years. Bear markets are accompanied by recessions, periods when the economy stops growing and instead contracts, leading to high unemployment rates. You can recognize a bear market if you know where the economy is in the business cycle. If it’s just entering the expansion phase, then a bear market is unlikely. But if it’s in an asset bubble, or if investors are behaving with irrational exuberance, then it’s probably time for the contraction phase and a bear market.
Causes A bear market is caused by a loss of investor, business, and consumer confidence. As confidence recedes, so does demand. This is the tipping point in the business cycle. It’s where the peak, accompanied by irrational exuberance, moves into contraction.This loss of confidence can be triggered by a stock market crash. That occurs when stock prices plummet 10% in a day or two, as they did in March 2020, when the outbreak of the new coronavirus rocked the financial markets broadly. Crashes are dangerous because prices only have to fall another 10% to trigger a bear market.