What is a Bear Market?

A bear market has the potential of signaling a recession and can have a strong impact across industries. Although a recession isn’t guaranteed as a result, awareness of a bear market can be helpful for job seekers and working professionals alike to prepare for the future.

By Timothy Mably

Professionals across multiple industries can benefit by becoming informed of a bear market. Events that drastically affect the world, like a pandemic or a war, can be key factors in economic decline. Rising inflation often plays a part in the process.

A bear market is defined as the point at which stocks fall by at least 20% after having reached a high. However, this percentage is only a threshold and a bear market generally sees stocks decline around 35% or more. This occurs in broad markets such as the S&P 500.?

A bear market conveys the beginning of decline, signaling the mentality of investors and companies who are likely pessimistic concerning the economy. A recession may be looming as a result. The most notable bear market occurred in the U.S. stock market at the start of the pandemic in 2020. They can last for a few weeks or a few years depending on the circumstances.

“For a typical investor with a $10,000 portfolio, assuming their investments roughly track the market, the value of their portfolio falls to $8,000,” says associate professor of finance Michael McDonald, who has taught a LinkedIn Learning course related to the subject.?

He says, “That may not seem like a big problem if you are young or just starting your career, but imagine you're getting ready to retire and all of a sudden, one-fifth, one-quarter, one-third, or for a severe bear market, even half of your savings disappear in the space of a few months.”?

Investors try to track the economy to determine what they should expect based on inflation, interest rates, and the job market among other factors. These can hint that the economy is beginning to slow down.

This economic turn of events can be upsetting for investors with consequences that carry over into the broader economy for long periods of time. Commercial real estate investor and broker Michael Bowen says, “Job seekers and the public should be aware that employers, banks and even consumers often pull back on hiring, lending or buying/investing when a bear market is in play.”

Bear Market Misconceptions

Although bear markets can provide opportunities for people to invest, it isn’t always that simple. McDonald identifies some misunderstandings regarding a bear market. He says, “People, younger investors, often see a bear market as being something they can try to time - jumping into stocks when they fall significantly in a bear market and then selling when things recover. The reality is that task is much harder to do than people think.”

“It's often said that markets can stay irrational longer than you can stay solvent - the individual investors who do well are typically those who ignore the day-to-day irrationality and stick to a long-term strategy based on their personal circumstances.”

Although investors may be pessimistic about the future, their response comes from a place of uncertainty. A bear market tends to be a temporary condition and doesn’t guarantee the direction of the overall economy.

Bowen says, “A bear market does not necessarily mean we are in a recession.” He points out that the Hartford Funds indicate that there have been a total of 26 bear markets since 1929. However, only 15 recessions occurred throughout that time.

He says, “While bear markets and recessions sometimes coincide, there are other times when prices decline temporarily but then recover quickly without any real slowdown in overall economic activity.”

Bear Market Stages

A bear market can be summed up into four distinct stages, beginning as investors choose to take profits. After the high prices fade and investors leave, prices will fall steeply.?

Trading decreases and causes the stock to become undesirable among investors. This is considered capitulation, which is when a sudden surge brings a drop in market prices. Investors tend to become panicked at this point and grow pessimistic about the future.

As others begin to join in the market, stock prices may rise again but don’t tend to meet the previous high. In this way, bear markets can be a circular process. The final stage sees prices dropping again, but at a steadier rate than before.?

At this point, bear markets can evolve into bull markets, which is when stock prices are estimated to rise. Whereas a bear market infers decline, a bull market promises growth. Following two declines of 20%, bull markets see prices go up by 20% again. Instead of worrying investors, this process excites investors.?

By having your finger on the pulse of the economy, you can be ready for potential changes in the job market. Whether you need to plan ahead to find new work or have an interest in investing during a bear market, there are several advantages to being informed.

Top Takeaways

What is a bear market?

• A bear market is defined as the point at which stocks fall by at least 20% after having reached a high.
• Events that drastically affect the world, like a pandemic or a war, can be key factors in economic decline.
• A bear market conveys the beginning of decline, signaling the mentality of investors and companies who are likely pessimistic concerning the economy.
• Bear markets don’t always guarantee a recession is coming. There have been a total of 26 bear markets since 1929. However, only 15 recessions occurred throughout that time.