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What is a bear market?
What is a bear market?
Firstly, it’s an investment term. Secondly, it’s about a widespread decline in company share prices, so for the most part, it’s a market state that doesn’t spell good news.
It contrasts a “bull market”, which sees the opposite trend.
That said, investors do find ways of making money during bear market times, which means that even though prices are falling, there is still room for activity.
What is a bear market?
Ask any investing expert, and they’ll tell you that a bear market has the following traits:
- It’s a period of prolonged price declines within a specific market.
- The stock index will have fallen by 20% or more from its most recent high.
- Bear markets are usually accompanied by economic pessimism and decreasing prosperity. In other words, recessions, unemployment and bear markets often (but not always) go hand in hand.
- Bear markets can be short-term (lasting a few weeks or months) or long-term (lasting years).
What causes a bear market?
Bear markets occur when investors believe businesses’ capacity for profit is about to diminish (or has already begun to slide).
Investors are constantly watching markets for signs of success or failure, analysing things like government policy, global outlooks, employment, hiring practices, wage increases and inflation.
Combined, these paint full pictures for investors about the environment they’re getting into. If investors see a terrible picture, they’ll know the economy is slowing and change their tactics, resulting in a drop in corporate share prices.
What should I know about bear markets?
The two most important things are how to recognise and navigate them.
Recognising them should be easy because even if you don’t immediately recognise the traits above, you’ll likely read and hear news commentary confirming that a bear market has taken hold.
As for navigating them, you should remember that, above all else, bear markets cause changes in investor behaviour.
Investing shifts
During bear markets, the prevailing pessimism and the desire to come out financially unscathed shape investor outlook. As a result, they adopt more defensive tactics.
- They will likely diversify to ensure that a slump in one sector doesn’t affect their overall portfolio.
- They will be reluctant to sell any assets, given the lower prices and the prospect of them rebounding at some uncertain point.
- In most cases, though, they’ll also be reluctant to buy assets because they’re not sure if prices have bottomed out yet.
- They will re-examine their risk appetite, sometimes in conjunction with professional advisors.
- They will look to invest in sectors that perform well during economic recessions.
For those in governance, the key is to determine how your company fits into their new investing environment.
Do your business model and strategy offer more or less promise? Will your profits increase or decrease? How will investors view your company in this changed landscape?
Answering these questions will put you on the right path towards remaining viable.
Can we tell if a bear market is coming?
Like most negative events, you can never be sure, except with the benefit of hindsight.
There may be warning signs in the form of predictions of the impending burst of an economic bubble. But these are merely signs that may never go anywhere.
Some are more telling than others, though. Investors will often keep their eye on national interest rates because these are telltale signs of a growing or contracting economy. Authorities like the US Federal Reserve or European Central Bank will lower interest rates during periods of contraction, and investors will likely take their cue from that.
In summary
Bear markets are not crises you can escape; you have to let them run their course. However, they are familiar and expected, and most don’t last long.
If you’re in a governance role, remember to think like an investor during a bear market and be sure how your company will navigate to the other side.