A Bear Market is a situation where the market experiences a lengthy period of price declines. It generally describes a state where securities fall below 20% from a recent high and people are pessimistic and reluctant to invest. A Bear Market Occurs when the overall market declines. According to Hartfordfunds, a decline in the market is often caused by a weak, slow or sluggish economy. Situations like global pandemics, wars, a drastic paradigm shift, and geopolitical crises often result in a Bear market. Understanding the aspects of a Bear Market will help investors better cope with the situation. With this in mind, below is a compilation of ten exciting facts about Bear Markets.
1. It is a market that experiences a prolonged price decline
A Bear Market has nothing to do with a bear or how it behaves when it attacks its prey suddenly. It also has nothing to do with the notorious characteristic of a bear of stealing goods and ransacking campsites. The term Bear Market originates from the Bearskin traders. The original traders of the country usually entered into an agreement where they sold skins they had not received or paid for. This is because the traders wished to buy the skin from sellers at a lower price and sell it at a higher price which is synonymous with what happens in a declining market. It is related to how a bear attacks its prey by scratching its claws downwards, an action that resembles the downward trend in a declining market.
2. A Bear Market occurs when the overall market index falls by 20% or more
To understand what happens in a bear market, we first need to know what a bear market is not. A Bear Market does not occur when stock prices are on a lower trend on most trading days, usually ninety days. It is also not a condition described by the National Bureau of Economic Research. When two businesses collude to publish that we are in a Bear Market, it does not occur. In reality, a Bear Market is where the overall market index falls by 20% or more from its peak. There are ongoing conversations among market watchers about the declining trend in 1990 that lasted for three months, whether it is a bear. During this period, the S&P declined by 19.9%
3. On average, a bear market can occur after 56 months.
According to the S&P Dow Jones Indices, we can predict that, on average, a Bear Market occurs every 56 months. According to Fedsmith, a good illustration of a Bear Market is when the Nasdaq Composite index closed on March 7 at a 20% low below its previous high on Nov 19, 2021. The S&P 500 on its side was at a high of 4976.56 on 3rd January. Additionally, any close of 3837.25 is below the set standard, and it loosely translates into a Bear Market.
4. Hyperinflation and high interest rates are the major causes of a Bear market
Several circumstances cause a Bear Market. Such scenarios include rising inflation, higher interest rates, military conflict, a sputtering economy, and geopolitical crisis. But which among these is likely to cause a Bear Market? We can note that military conflicts and geopolitical crises are the most negligible contributing factors to a Bear Market.
5. Bear Markets do not automatically result in recessions
We have two types of Bear Market; recessionary and non-recessionary. A Bear market will often precede or coincide with an economic downturn. However, there are several situations where there is a Bear Market in the stock market, which has zero ripple effect on the economy.
6. In 1929 we had the worst Bear Market of all time
The Bear Market in 1929 is one of the worst to date because it happened just before the much anticipated Black Monday. It will be a shock to many, but the worst Bear Market started in 1973 and lasted through the fall of 1974. During this period, we saw oil prices skyrocketing, which resulted in exorbitant prices of essential commodities.
7. The longest Bear Market lasted for 9.6 months
Many investors speculate that an average Bear Market lasts for about a year or several months. Others estimate that it can last for at least two years. Regardless of the timing, it feels like the situation is permanent once it sets in. According to Ned Davis Research, the longest Bear Market since 1929 has lasted for nine and a half months. According to Forbes, it is better to be in a Bear Market than a Bull Market. A typical Bull Market can last for several years.
8. It is profitable to invest in Treasury Bonds and Gold funds in a Bear Market
Investing in Treasury bonds is the best investment that one can make to get through a Bear Market. You can also invest in gold or gold funds. Gold is a portfolio diversifier, and it takes an upward trend when the stock market is on a downward trend.
9. The worst investment in a Bear Market is in the highest growth stocks
The worst situation to be in when there is a Bear Market is the highest growth stocks. When there is a Bear Market, these stocks are among the worst-performing. This is because, before a Bear Market, these stocks’ popularity expanded rapidly before everything crashed.
10. Bear Markets have been less frequent since World War II
The period during World War II was the most turbulent time ever recorded in history. CNBC has a record of 12 Bear Markets between 1928 and 1945, approximately one Bear Market after one year and three months. After World War II, there were 14 Bear Markets, and the statistic improved to one Bear Market after five years and three months.
Bear Markets is an exciting situation to understand. Just like athletes need rest to be healthy, sometimes the economy needs to reset from record-setting performances. It is advantageous for investors to acquire knowledge of what happens during a Bear Market to implement the necessary precautions to overcome this turbulent period. It may feel like a permanent situation, but it will surely pass.
Written by Allen Lee
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