What is a Bear Market?
A bear market is when the price of an asset class declines pretty substantially over time which most analysts announce a bear market when prices have fallen 20% or more.
The term is widely used when talking about the stock market, especially the major indices: Dow Jones Industrial Average, the S&P 500 or the NASDAQ.
A bear market usually has to make lower lows and lower highs over time. While the average length of a bear market is 367 days, conventional wisdom says it usually lasts 18 months. Bear markets occurred 32 times between 1900 and 2008, with an average duration of 367 days — this is around once every three years.
It’s much worse than a stock market correction, which seems bad enough at the time. That’s when the stock market drops 10% and it can be kicked off by a stock market crash, which is when the market drops 10% or more in just a few days.
A bear market is usually accompanied by a recession — that’s when the economy stops growing, and even contracts. It usually also entails layoffs and high unemployment rates.
A bear market is difficult to predict — it may look like a correction, until you’ve already lost more than 10% of your portfolio. However, it helps 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. However, if it’s been experiencing an asset bubble, or investors are behaving with irrational exuberance then it’s probably time for the contraction phase, and a bear market.
Bear Market 2013
Looking at the current bull market, there certainly are danger signs that conditions could change, particularly in the case of policy mistakes. Checking the Bear Market checklist, none of them are filled in yet.
- Is the Federal Reserve tightening monetary policy?
- Are stock price valuations stretched?
- Is investor euphoria present?
- Are bond spreads widening?
- Is there a recession looming?
- Are transportation stocks, small caps and bank stocks retreating?
Right now we are 0-for-6 in the bear market checklist but a Stock Market Crash may come later.
In spite of the seemingly easy path to more gains for the stock market, which is up the more than 20 percent from its last low required for a technical bull market, there is still plenty of fear in the market.
Many market experts believe that the main propulsion behind the surge has been the Fed, which is buying $85 billion in Treasury’s and mortgage-backed securities each month in an effort to keep liquidity flowing.
This year has seen the first consistent inflows in stock-based mutual funds since the financial crisis began, but investors are still cautious and pouring just as much cash into bond funds.