A bear market is a term used to describe a group of securities (such as stocks or bonds) falling in price – a negative trend in the market.
A bear market is the opposite of a bull market – when market prices are rising.
The term can be used to describe any group of securities that are falling in price, such as stocks, commodities, bonds, etc.
The reason economists use the term “bear market” to describe decreasing market prices may have stemmed from the fact that bears swipe downwards with their paws when attacking – a metaphoric description of a decline in the market. Bulls, on the other hand, thrust upwards with their horns.
The terms ‘bull’ and ‘bear’ may have come from the animals’ movements when they attack.
The “bear market” could also have come from the London bearskin “jobbers”; people who sold bearskins before actually having caught any bears, which goes against the French saying “don’t sell bearskins before you have killed the bear” (ne vendez pas la peau de l’ours avant de l’avoir tué), a caution against over-optimism.
By 1721, during the time of the South Sea Bubble, the bear was linked to short selling. Jobbers sold bears they did not own expecting prices to fall, which would enable them to buy them later on at greater profit.
If you are bearish it means you are pessimistic about the market climate, and if you are bullish you are optimistic.
One of the most memorable bear markets in history is the Great Depression of the 1930s.
Example of a bearish trend – Dow Jones Industrial Average dropping between 1929 and 1932
What causes a bear market?
Simply put, a bear market occurs when there are more sellers than buyers.
How does one know when this is about to happen? Predicting the direction in which markets may go is nearly impossible (one never knows what can suddenly happen).
However, understanding what factors shake the market can help. A bear market can be caused by:
- Inflation rising very quickly.
- High unemployment rates.
- An economy entering a recession.
How to invest in a bear stock market
If you want to reduce your exposure during a bear market then one strategy is to sell all your investments in securities and find safer options (such as short-term government bonds).
However, for those who wish to continue investing during a bear market, then the best strategy is to invest in blue chip companies with impressive profit figures and an established company history – they are less affected by market trends.
Investors should avoid smaller, start-up companies, as they may not have the financial security to ride through the market conditions.
In a market full of bears, the solitary bull is known as a contrarian investor, as is the solitary bear in a market full of bulls.
Below is a list of the most famous bear markets in modern history:
- 1929-1932 – The Wall Street crash on October 29th, 1929, led to the Great Depression, and the bear market. In a period of less than three years the S&P 500 declined 86%. It was not until 1954 that its previous peak was regained.
- 1946-1949 – soon after WWII stock prices reached a peak and then started a long decline that lasted over three years.
- 1961 (December) – 1962 (June) – although the US economy grew in 1961, the Bay of Pigs Attack (1961) and the Cuban Missile Crisis (1962) sent stock prices into a six-month decline.
- 1968 (November) – 1970 (May) – just as Richard Nixon became President the US economy, which had been doing well, entered a mild recession with 6% inflation.
- 1973 (January) – 1974 (October) – energy prices surged following Israel’s Yom Kippur War, inflation reached 10%, Nixon had to resign in the wake of the Watergate scandal.
- 1980 (November) – 1982 (August) – the Fed raised interest rates to almost 20% as it tried to address ten years of persistent inflation.
- 1987 (August) – 1987 (December) – following the ‘Black Monday’ crash on October 19th, there was a 6-month-long bear market.
- 2000 (October) – 2002 (October) – this bear market followed the bursting of the dot-com bubble.
- 2007 (October) – 2009 (March) – the burst of the housing bubble and toxic debts (mortgage delinquency) affected the credit market, which led to a long period in which shares slid. During this period the terms ‘toxic debts’ and ‘toxic assets’ became commonplace as banks started collapsing, with several having to be bailed out by the taxpayer in many of the advanced economies.
Video – Bear versus Bull markets