what is a bear market 
a bear market is a financial market experiencing prolonged price declines generally of 20 or more a bear market usually occurs along with widespread investor pessimism large scale liquidation of securities and other assets and a weakening economy bear markets are often associated with declines in an overall market or index like the s p 500 but individual securities or commodities can also be considered to be in a bear market if they experience a decline of 20 or more over a sustained period of time typically two months or more bear markets also may accompany general economic downturns such as a recession bear markets are seen as the opposite of upward trending bull markets investopedia daniel fishelunderstanding bear marketsstock prices generally reflect how investors expect companies to perform if a company has lower than expected profits or experiences less growth than analysts predicted investors may respond by selling the company s stock which makes the overall price decline the combination of herd behavior and fear can create a rush to minimize losses which in turn can lead to prolonged periods of depressed asset prices one definition of a bear market says markets are in bear territory when stocks on average fall at least 20 off their high but 20 is an arbitrary number just as a 10 decline is an arbitrary benchmark for a correction another definition of a bear market is when investors are more risk averse than risk seeking this kind of bear market can last for months or years as investors shun speculation in favor of boring sure bets the causes of a bear market often vary but in general a weak or slowing or sluggish economy bursting market bubbles pandemics wars geopolitical crises and drastic paradigm shifts in the economy such as shifting to an online economy are all factors that might cause a bear market the signs of a weak or slowing economy are typically government interventions in the economy can also trigger a bear market for example changes in the tax rate or the federal funds rate can lead to a bear market similarly a drop in investor confidence may also signal the onset of a bear market when investors believe something is about to happen they will take action in the case of an imminent bear market selling off shares to avoid losses bear markets can last for multiple years or just several weeks a secular bear market can last anywhere from 10 to 20 years and is characterized by below average returns on a sustained basis there may be rallies within secular bear markets where stocks or indexes rally for a period but the gains are not sustained and prices revert to lower levels a cyclical bear market on the other hand can last anywhere from a few weeks to several months the u s major market indexes were close to bear market territory on december 24 2018 falling just shy of a 20 drawdown 1 more recently major indexes including the s p 500 and dow jones industrial average djia fell sharply into bear market territory between march 11 and march 12 2020 2 prior to that the last prolonged bear market in the united states occurred between 2007 and 2009 during the financial crisis and lasted for roughly 17 months the s p 500 lost 50 of its value during that time 3in february 2020 global stocks entered a sudden bear market in the wake of the global coronavirus pandemic sending the djia down 38 from its all time high on february 12 29 568 77 to a low on march 23 18 213 65 in just over one month 4 however both the s p 500 and the nasdaq 100 made new highs by august 2020 5phases of a bear marketbear markets usually have four different phases the first phase is characterized by high prices and high investor sentiment towards the end of this phase investors begin to drop out of the markets and take in profits in the second phase stock prices begin to fall sharply trading activity and corporate profits begin to drop and economic indicators that may have once been positive start to become below average some investors begin to panic as sentiment starts to fall this is referred to as capitulation the third phase shows speculators start to enter the market consequently raising some prices and trading volume in the fourth and last phase stock prices continue to drop but slowly as low prices and good news starts to attract investors again bear markets start to lead to bull markets the bear market phenomenon is thought to get its name from the way in which a bear attacks its prey swiping its paws downward this is why markets with falling stock prices are called bear markets just like the bear market the bull market may be named after the way in which the bull attacks by thrusting its horns up into the air bear markets vs correctionsa bear market should not be confused with a correction which is a short term trend that has a duration of fewer than two months while corrections offer a good time for value investors to find an entry point into stock markets bear markets rarely provide suitable points of entry this barrier is because it is almost impossible to determine a bear market s bottom trying to recoup losses can be an uphill battle unless investors are short sellers or use other strategies to make gains in falling markets between 1900 and 2018 the dow jones industrial average djia had approximately 33 bear markets averaging one every three years 6 one of the most notable bear markets in recent history coincided with the global financial crisis occurring between october 2007 and march 2009 during that time the dow jones industrial average djia declined 54 3 the global covid 19 pandemic caused the most recent 2020 bear market for the s p 500 and djia the nasdaq composite most recently entered a bear market in march 2022 on fears surrounding war in ukraine economic sanctions against russia and high inflation 7short selling in bear marketsinvestors can make gains in a bear market by short selling this technique involves selling borrowed shares and buying them back at lower prices it is an extremely risky trade and can cause heavy losses if it does not work out a short seller must borrow the shares from a broker before a short sell order is placed the short seller s profit and loss amount is the difference between the price where the shares were sold and the price where they were bought back referred to as covered for example an investor shorts 100 shares of a stock at 94 the price falls and the shares are covered at 84 the investor pockets a profit of 10 x 100 1 000 if the stock trades higher unexpectedly the investor is forced to buy back the shares at a premium causing heavy losses short selling is a risky trading strategy with the possibility for high losses it is not suitable for inexperienced investors puts and inverse etfs in bear marketsa put option gives the owner the freedom but not the responsibility to sell a stock at a specific price on or before a certain date put options can be used to speculate on falling stock prices and hedge against falling prices to protect long only portfolios investors must have options privileges in their accounts to make such trades outside of a bear market buying puts is generally safer than short selling inverse etfs are designed to change values in the opposite direction of the index they track for example the inverse etf for the s p 500 would increase by 1 if the s p 500 index decreased by 1 there are many leveraged inverse etfs that magnify the returns of the index they track by two and three times like options inverse etfs can be used to speculate or protect portfolios real world examples of bear marketsthe ballooning housing mortgage default crisis caught up with the stock market in october 2007 back then the s p 500 had touched a high of 1 565 15 on october 9 2007 8 by march 5 2009 it had crashed to 682 55 as the extent and ramifications of housing mortgage defaults on the overall economy became clear 9 the u s major market indexes were again close to bear market territory on december 24 2018 falling just shy of a 20 drawdown 1most recently the dow jones industrial average went into a bear market on march 11 2020 and the s p 500 entered a bear market on march 12 2020 10 this followed the longest bull market on record for the index which started in march 2009 stocks were driven down by the onset of the covid 19 pandemic which brought with it mass lockdowns and the fear of depressed consumer demand during this period the dow jones fell sharply from all time highs close to 30 000 to lows below 19 000 in a matter of weeks from february 19 to march 23 the s p 500 declined 34 1112other examples include the aftermath of the bursting of the dot com bubble in march 2000 which wiped out approximately 49 of the s p 500 s value and lasted until october 2002 13 and the great depression which began with the stock market collapse of october 28 29 1929 14