CNN Business. ” Stocks plunge into bear market territory: March 12, 2020 .” Accessed April 4, 2021.
One definition of a bear market says markets are in bear territory when stocks, on average, fall at least 20% off their high. But 20% is an arbitrary number, just as a 10% decline is an arbitrary benchmark for a correction. Another definition of a bear market is when investors are more risk-averse than risk-seeking. This kind of bear market can last for months or years as investors shun speculation in favor of boring, sure bets.
CNBC. ” By the numbers: Stock market collapses on Christmas Eve, heads for worst December ever .” Accessed April 4, 2021.
The ballooning housing mortgage default crisis caught up with the stock market in October 2007. Back then, the S&P 500 had touched a high of 1,565.15 on October 9, 2007. By March 5, 2009, it had crashed to 682.55, as the extent and ramifications of housing mortgage defaults on the overall economy became clear. The U.S. major market indexes were again close to bear market territory on December 24, 2018, falling just shy of a 20% drawdown.
A bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.
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Associated Press. ” A look at what happens when stocks enter a bear market .” Accessed April 4, 2021.
In February 2020, global stocks entered a sudden bear market in the wake of the global coronavirus pandemic, sending the DJIA down 38% from its all-time high on February 12 to a low on March 23 in just over one month. However, both the S&P 500 and the Nasdaq 100 made new highs by August 2020.
A bear market should not be confused with a correction, which is a short-term trend that has a duration of fewer than two months. While corrections offer a good time for value investors to find an entry point into stock markets, bear markets rarely provide suitable points of entry. This barrier is because it is almost impossible to determine a bear market’s bottom. Trying to recoup losses can be an uphill battle unless investors are short sellers or use other strategies to make gains in falling markets.
Edward Jones. ” Don’t Fear the Bear .” Accessed April 4, 2021.
CNN Business. ” Stocks are at an all-time high. Here’s what stopped the last 12 bull runs .” Accessed April 4, 2021.
MarketWatch. ” How the coronavirus recession has rewritten the traditional bear-market playbook .” Accessed March 25, 2021.
WIRED. ” March 10, 2000: Pop Goes the Nasdaq! ” Accessed April 4, 2021.
For example, changes in the tax rate or in the federal funds rate can lead to a bear market. Similarly, a drop in investor confidence may also signal the onset of a bear market. When investors believe something is about to happen, they will take action—in this case, selling off shares to avoid losses.
The bear market phenomenon is thought to get its name from the way in which a bear attacks its prey—swiping its paws downward. This is why markets with falling stock prices are called bear markets. Just like the bear market, the bull market may be named after the way in which the bull attacks by thrusting its horns up into the air.
Most recently, the Dow Jones Industrial Average went into a bear market on March 11, 2020, and the S&P 500 entered a bear market on March 12, 2020. This followed the longest bull market on record for the index, which started in March 2009. Stocks were driven down by the effects of the coronavirus and falling oil prices due to the split between Saudi Arabia and Russia. During this period, the Dow Jones fell sharply from all-time highs close to 30,000 to lows below 19,000 in a matter of weeks.
Stock prices generally reflect future expectations of cash flows and profits from companies. As growth prospects wane, and expectations are dashed, prices of stocks can decline. Herd behavior, fear, and a rush to protect downside losses can lead to prolonged periods of depressed asset prices.
The New York Times. ” Dow Skids Into Bear Market, Heralding an Uncertain Future .” Accessed April 4, 2021.
Inverse ETFs are designed to change values in the opposite direction of the index they track. For example, the inverse ETF for the S&P 500 would increase by 1% if the S&P 500 index decreased by 1%. There are many leveraged inverse ETFs that magnify the returns of the index they track by two and three times. Like options, inverse ETFs can be used to speculate or protect portfolios.
Yahoo! Finance. articles on stock market investing ” S&P 500 .” Accessed March 25, 2021.
CNBC. ” How the pandemic drove massive stock market gains, and what happens next .” Accessed April 4, 2021.
Other examples include the aftermath of the bursting of the dot com bubble in March 2000, which wiped out approximately 49% of the S&P 500’s value and lasted until October 2002; and the Great Depression which began with the stock market collapse of October 28-29, 1929.
Fears about the spread of the COVID-19 virus drove global economies into a downward spiral, sending markets into bear territory in early to mid-2020. Forbes reported that the S&P 500 dropped 34% by March 23, 2020, to 2,237.40. This made the drop one of the worst in the history of the index. It didn’t break past the 3,000-point mark until May 27, 2020, when it reached 3,036.13 and began climbing higher.
For example, an investor shorts 100 shares of a stock at $94. The price falls and the shares are covered at $84. The investor pockets a profit of $10 x 100 = $1,000. If the stock trades higher unexpectedly, the investor is forced to buy back the shares at a premium, causing heavy losses.
The U.S. major market indexes were close to bear market territory on December 24, 2018, falling just shy of a 20% drawdown. More recently, major indexes including the S&P 500 and Dow Jones Industrial Average fell sharply into bear market territory between March 11 and March 12, 2020. Prior to that, the last prolonged bear market in the United States occurred between 2007 and 2009 during the Financial Crisis and lasted for roughly 17 months. The S&P 500 lost 50% of its value during that time.
Bear Market Definition Phases & articles on stock market investing Examples
A put option gives the owner the freedom, but not the responsibility, to sell a stock at a specific price on, or before, a certain date. Put options can be used to speculate on falling stock prices, and hedge against falling prices to protect long-only portfolios. Investors must have options privileges in their accounts to make such trades. Outside of a bear market, buying puts is generally safer than short selling .
Securities and Exchange Commission. ” Bear Market .” Accessed March 1, 2021.
The causes of a bear market often vary, but in general, a weak or slowing or sluggish economy , bursting market bubbles, pandemics, wars, geopolitical crises, and drastic paradigm shifts in the economy such as shifting to online economy, are all factors that might cause a bear market. The signs of a weak or slowing economy are typically low employment, low disposable income, weak productivity, and a drop in business profits. In addition, any intervention by the government in the economy can also trigger a bear market.
CNBC. ” Dow plunges 10% amid coronavirus fears for its worst day since the 1987 market crash .” Accessed April 4, 2021.
CNNMoney. ” Dow, S&P break records .” Accessed April 4, 2021.
Futures/Commodities Trading Strategy & Education
Investors can make gains in a bear market by short selling . This technique involves selling borrowed shares and buying them back at lower prices. It is an extremely risky trade and can cause heavy losses if it does not work out. A short seller must borrow the shares from a broker before a short sell order is placed. The short seller’s profit and loss amount is the difference between the price where the shares were sold and the price where they were bought back, referred to as “covered.”
Forbes. ” The Coronavirus Stock Market: A Market Gone Wild .” Accessed March 25, 2021.
Bear markets can last for multiple years or just several weeks. A secular bear market can last anywhere from 10 to 20 years and is characterized by below-average returns on a sustained basis. There may be rallies within secular bear markets where stocks or indexes rally for a period, but the gains are not sustained, and prices revert to lower levels. A cyclical bear market, on the other hand, can last anywhere from a few weeks to several months.
James Chen, CMT is an expert trader, investment adviser, and global market strategist. He has authored books on technical analysis and foreign exchange trading published by John Wiley and Sons and served as a guest expert on CNBC, BloombergTV, Forbes, and Reuters among other financial media.
Bear markets usually have four different phases.
Federal Reserve History. ” Stock Market Crash of 1929 .” Accessed April 4, 2021.
Between 1900 and 2018, the Dow Jones Industrial Average had approximately 33 bear markets, averaging one every three years. One of the most notable bear markets in recent history coincided with the global financial crisis occurring between October 2007 and March 2009. During that time the Dow Jones Industrial Average declined 54%. The global COVID-19 pandemic caused the most recent 2020 bear market.
CNBC. ” Stock market live updates: articles related stock market