A lot of concerned new investors are asking the same question: what is a bear market? Well, now more than ever, it’s time to find out.
If you are a young or budding investor, you will no doubt have been exposed to much jargon and several acronyms within the industry, and you probably have a million questions such as:
One of those unusual terms that you may have heard is probably the ‘bear market’.
Contrary to popular belief, a bear market is not a bazaar full of bears buying and selling goods, nor is it a store where one can purchase a bear. A bear market is a condition in which the price of securities falls 20% or more from recent highs amid widespread pessimism and negative investor sentiment.
In fact, at the time of writing, the stock market is in the midst of the fastest bear market in history. To better grasp this concept, here is a graph from our ever-growing Twitter (NYSE: TWTR) army of followers that can show the speed of which the market declined in the early months of 2020:
Fastest bear on record: polar, at 25mph.— Tracy Alloway (@tracyalloway) March 16, 2020
Fastest bear market on record: This one, at 21 days from peak. pic.twitter.com/99frbGR1K7
So what does this mean?
To put this into context, between the Great Recession in 2008 and the coronavirus panic of 2020, the market was undergoing its longest ‘bull-run’ in history, which meant that stocks were on the rise without halt. The tech sector was booming, and big companies such as Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Google (NASDAQ: GOOG)(NASDAQ: GOOGL) saw their stocks soar.
Think of a bear market as the exact opposite of this. In February 2020, the bull market ended, and the bear market took over. The stock market took a beating and continues to do so, with many stocks that made massive gains in the prior six months, such as Tesla (NASDAQ: TSLA) and Virgin Galactic (NYSE: SPCE) experiencing breakneck freefalls, erasing billions of dollars of growth.
To be more precise, America’s key indexes, the S&P 500 (NYSEARCA: VOO), the Nasdaq (INDEXNASDAQ: .IXIC), and Dow Jones (INDEXDJX: .DJI) will all have to fall into bear territory (a 20% drawdown from all-time highs) in order to officially classify it as a bear market.
What causes a bear market?
Generally, a bear market is concurrent with a sluggish, or weak economy. There are several factors that contribute to this such as low employment, slowing consumer spending, narrowing business profit margins; many of the same factors that can lead to a recession.
In early 2020, the bear market was caused by a mass sell-off in the market due to concerns related to the deadly coronavirus pandemic. As supply lines became disrupted and consumer spending slowed, the Federal Reserve began cutting rates while investors lost confidence and sold shares en masse to avoid losses.
At the time of writing, this reaction is still ongoing.
Secular and Cyclical Bear Markets
An individual company’s stock can become ‘bearish’ with a 20% drop, while the market can also hit bear territory, but there are two different types.
Secular bear market: This type of market is long term, and can last anywhere between 10 and 20 years, and is defined by the market consistently showing below-average returns. There may be rallies in this period, but it remains a bear market if these are not sustained.
Cyclical bear market: The clue is in the name here, as a cyclical market can last mere weeks, or several years, flip-flopping between growth and decline repeatedly. The cyclical market runs in, you guessed it, cycles.
We’re not fans of bears…
Here at MyWallSt we maintain a ‘buy and hold ‘til you’re gray and old’ philosophy, which means that we invest with the long-term in mind. Therefore, market downturns, bear markets, and even recessions do not faze us, but rather present us with a unique discount buying opportunity of our favorite stocks.
If you’re getting started in your investment journey, always remember MyWallSt’s six golden rules:
1. Get started: No matter how big or small the investment.
2. Think long-term: The buy and hold philosophy will outperform the market in the long-term.
3. Never borrow to buy: Save first, then invest.
4. Diversify: Accumulate a minimum of 12 stocks across 6 different sectors.
5. Buy what you believe: Own part of a business you love.
6. Invest What You Can, When You Can: Get your saving habits right.
Combine this with our list of market-beating stocks, and you could be on to a winner. You can enjoy a free trial here and see it for yourself.
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.