What is a Bear Market?

by | Aug 5, 2022 | Research

The financial industry is littered with jargon. When pundits use this murky language to describe current market conditions, it can leave investors feeling frustrated and excluded from the conversation.

At DreamWork Financial Group, we strive to educate investors on the markets so they can feel empowered to make the right investing decisions. One way that we accomplish this is by deconstructing commonly used jargon, beginning with the term “bear market.” This phrase has a simple meaning but an immense impact on individuals’ investing decisions.

What is a Bear Market?

A bear market occurs when stock values fall by 20% or more from a recent high and sustain those losses for at least two months. This is the opposite of a bull market which is characterized by a prolonged period of rising stock prices.

What is a Bearish Outlook?

You may also hear the terms “bullish” and “bearish” when discussing the stock market. When someone has a bearish outlook, they anticipate lower stock prices in the future. On the other hand, an investor with a bullish outlook is optimistic about the future of stock prices.

What is the difference between a bear market and a recession?

Bear markets and recessions often coincide, but they are not the same. A bear market only refers to investments – most commonly stocks, though the term can apply to other assets as well like bonds or commodities. A recession is a sustained period of negative economic growth typically characterized by negative real GDP, lower real income, reduced employment, falling industrial production, and/or slower retail sales. In other words, a recession refers to a downturn in the economy while a bear market refers to a downturn in an investment market.

What Causes a Bear Market?

There are many factors that impact business profitability and stock prices. Some of the most common factors that lead to bear markets include:

Economic Contractions

Periods of economic expansion often come to a natural conclusion and the economy enters a trough. This trough can be a recession, or just a slowdown in spending and productivity. When this occurs, businesses often see slower sales and reduced profitability which can lead to lower stock prices.

Rising Interest Rates

Higher interest rates can curb consumer spending, leading to lower demand and consequently lower revenue for businesses. Additionally, many stocks derive their value from a calculation that relies on the risk-free rate. As the risk-free rate rises, stock valuations typically fall.

Market Bubbles

A bubble forms when assets in a particular sector are significantly overvalued. When the bubble pops, investors are forced to sell, and supply overwhelms demand. Prices tend to crash when a bubble pops and this can have a ripple effect throughout the rest of the markets.

Geopolitical Turmoil

In an increasingly globalized business environment, war and political disputes in any area of the world can have a negative impact on U.S. financial markets. This includes revaluing of stocks as political instability impacts businesses’ abilities to sell their products and source their inputs.

Reduced Availability of Inputs

Natural disasters, disease, trade disputes, and political tensions can all prevent businesses from accessing the inputs they need to produce their goods. When businesses can’t source their materials, output and sales suffer. In addition, shortages can increase the price of raw materials, leading to higher costs for businesses and lower profitability. These factors often lead to lower stock prices.

Investor Pessimism

The stock market is heavily dependent on investor sentiment. When investors believe that their investments will continue to increase in value, they tend to buy, and this demand can drive up stock prices. On the other hand, when they believe that their investments could lose value, they tend to sell – reducing demand for stocks. For this reason, a moderate downturn can snowball into a bear market based on investor fear.

Investing During a Bear Market

How an investor positions their assets during a bear market will depend on their specific situation and goals. Investors whose main goal is safety will often reevaluate the downside risk to their portfolio and consider options for reducing this risk. On the other hand, investors who favor a long-term growth strategy may consider a bear market a buying opportunity.

An experienced wealth manager can help investors determine the best allocation for their specific situation and the current market – whether that means minimizing risk or taking advantage of opportunities.

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With Investing Gameplan™, and a partnership with a fiduciary advisor, you can make the most of any market condition, including a bear market. Whether your goals are asset protection, income, or growth, our advisors can create a custom portfolio of individual stocks and low-cost ETFs to help you achieve them.

Contact us to get started.