In short: A Bear Market when stocks in general go down more than 20% we call it a bear market.
A bear market occurs when the price of an investment falls at least 20% from its high. For example, when the Dow Jones Industrial Average continued a decline on March 11 from its average on Feb. 12, 2020, of 29,551.52, the Dow entered a bear market, because that was more than 20% lower than the Dow’s most recent 52-week high.2
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 like oil. They don’t, however, apply to consumer prices. Instead, when consumer prices 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 a bull market and to regularly take profits.
How to Recognize a Bear Market
The exact definition of a bear market depends on who you ask, but it generally refers to a serious, sustained decline in the value of assets. The Securities and Exchange Commission (SEC) defines a bear market as a broad market index decline of 20% or more over at least a two-month period.1
According to investment company Invesco, the average length of a bear market is 363 days.4 By Fidelity’s calculation, a bear market occurs roughly every six years.5
Bear markets are sometimes 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. On the other hand, if the business cycle is experiencing an asset bubble, or if investors are behaving with irrational exuberance, then a wise investor will be on the lookout for the first signs of a 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, and prices fall. 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 in a day or two. Crashes can expedite the end of a bull market.
Investors also worry about bear markets after a stock market correction, which is less sudden than a crash. That’s when prices decrease by 10%, but perhaps over weeks or months.
