Bear Market: Meaning, Types, Causes Bearish Market

When the S&P 500 Index dropped by 20% on May 20th, 2022, from its record high in January 2022, investors worldwide were quick to declare a bear market. Both investors and Wall Street are spooked, to say the least, investors are contemplating selling their stocks, and everyone is waiting for the bear to turn into the bull.

But what is the bear market? More importantly, should you be worried about it? Let’s find out.

What is a bear market meaning?

Simply put, a bear market is a prolonged period during which the prices of stocks fall consistently. When this continues for a long time, investors become wary of buying stocks, causing a further drop in stock prices. This cycle continues and the stock prices keep falling.

For investors, however, a bear market is whenever there is a downturn of greater than 20% in multiple broad market indices over two months. This includes Sensex, S&P BSE, or similar.

Now we know what a bear market is, the obvious question is what causes it.

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How to recognize a bear market?

A bear market is typically identified by a combination of two key indicators:

- Recession: An economic downturn or recession can be a sign of a bear market. A recession is caused by a significant slowdown in economic activity, which leads to reduced corporate profits, layoffs, and lower consumer spending. During such periods, investor confidence declines, contributing to a bear market.

- Falling stock market indices: A bear market is typically defined as a drop of 20% or more in major stock indices from their recent highs. This drop is usually driven by low confidence in the market, with investors selling off stocks expecting further declines.

These indicators reflect a low-confidence economic environment where investors expect continued losses.

What causes a bear market?

Plenty of factors can lead to a bear market-like situation. A few common reasons for bear markets over the years have included-

- Global health crises or pandemics

- Low periods of economic growth characterised by low employment rates, high inflation, low disposable income, etc.

- Geopolitical crises

- World recession

- Tightening of fiscal policies, to name a few.

In simple terms, any situation wherein there are more sellers than buyers can lead to a bear market.

Types of a bear market

A bear market can be categorized into two main types:

- Secular: This is caused by a prolonged period of market decline, often lasting for years. During a secular bear market, the market experiences constant downturns with occasional rallies, but the general trend remains negative.

- Cyclical: Unlike a secular bear, a cyclical bear market is a shorter, more temporary decline. It is usually driven by business cycle fluctuations or economic recessions. Once the economy recovers, the market returns to its previous growth trajectory.

Additional Read: How to Invest in the Share Market for Beginners in India

Consequences of a bear market

A bear market can have significant consequences across various economic sectors:

- Declining stock prices: Investors see their portfolios lose value as the market trends downward, leading to reduced wealth and confidence.

- Lower investment activity: With stocks underperforming, both retail and institutional investors may reduce or halt their investments.

- Reduced consumer spending: As confidence in the market falls, consumers tend to cut back on discretionary spending, which further slows economic growth.

- Economic slowdown: Lower spending, reduced investments, and a pessimistic market outlook can contribute to a broader economic slowdown.

- Higher market volatility: Bear markets are often accompanied by increased volatility leading to unpredictable market swings.

What should investors do?

During a bear market, you should remain calm and avoid panic selling. Diversify your portfolio to reduce risk and focus on long-term investment goals. It's important to review financial plans and make adjustments if needed.

You can also consider buying undervalued stocks or assets, as bear markets often present opportunities for long-term growth. If you're unsure, it's best to seek professional advice from a financial advisor to navigate market fluctuations.

How to invest in a bear market?

Investing in a bear market requires a disciplined approach. Here are a few strategies to consider:

- Focus on quality: Invest in high-quality stocks with strong fundamentals, as they are more likely to bounce back when the market recovers.

- Rupee-cost averaging: Invest a fixed amount periodically, regardless of market conditions. This reduces the impact of short-term volatility and allows you to buy more shares when prices are low.

- Dividend stocks: Look for companies that consistently pay dividends, as they can provide a steady income stream even when stock prices are falling.

- Diversification: Maintaining a diversified portfolio can help mitigate risk. Invest in a mix of asset classes such as bonds, real estate, and international stocks.

- Long-term focus: Bear markets can present opportunities for long-term investors to buy undervalued stocks and hold them until market conditions improve.

FAQs on bear market

1. What is a bear market?

A bear market is a period where stock prices decline by 20% or more from their peak, signalling a downturn. It can be caused due to economic slowdowns, falling investor confidence, or external factors.

2. Where to invest in a bear market?

During a bear market, consider defensive stocks, dividend-paying stocks, high-quality bonds, and diversified portfolios.

3. How to spot a bear market?

Bear markets often result in prolonged declines in stock market indices, declining investor sentiment, and weakening economic indicators like GDP and employment.

4. What are the causes of a bear market?

Bear markets are often triggered by recessions, economic slowdowns, tightening monetary policies, or global crises.

5. How long does a bear market last?

Bear markets typically last between 9 to 18 months, though their duration can vary.