Bear market

Definition

A bear market is a period of declining prices in the stock market, typically defined as a drop of 20% or more from recent highs. This condition can signal a lack of investor confidence and may lead to widespread selling, further driving down prices. Bear markets can be driven by various factors, including economic downturns, rising interest rates, or geopolitical events, and they often coincide with recessions.

5 Must Know Facts For Your Next Test

1. Bear markets can last for months or even years, and they often create a cycle where negative sentiment feeds on itself as investors sell off assets.
2. Historically, bear markets have been associated with economic recessions, although they can occur without an accompanying recession.
3. The average bear market decline has been around 30% from peak to trough.
4. Investors often look for opportunities to buy stocks at lower prices during bear markets, hoping to benefit when the market eventually recovers.
5. During a bear market, defensive stocks such as utilities and consumer staples tend to perform better than more volatile sectors.

Review Questions

• What are some common characteristics of a bear market and how do they differ from a bull market?
  • A bear market is characterized by declining stock prices, typically falling 20% or more from recent highs, while a bull market features rising prices and strong investor confidence. During a bear market, investor sentiment tends to be negative, leading to widespread selling, whereas in a bull market, optimism prevails, encouraging buying. These opposing conditions reflect different phases of market cycles that can be influenced by economic indicators and external events.
• How do bear markets influence investor behavior and strategies compared to bull markets?
  • In bear markets, investors often adopt more conservative strategies due to increased uncertainty and risk aversion. Many may choose to sell off stocks to prevent further losses or shift their investments into safer assets like bonds. Conversely, during bull markets, investors are generally more willing to take risks and may focus on growth stocks or other high-reward opportunities. This shift in behavior illustrates how market conditions can significantly impact investment decisions.
• Evaluate the implications of bear markets on the broader economy and how they can shape future market cycles.
  • Bear markets can have profound implications for the broader economy by affecting consumer confidence and spending habits. As stock prices fall, individuals may feel less wealthy and reduce their expenditures, which can lead to slower economic growth or even recession. Additionally, prolonged bear markets can cause businesses to cut back on investment and hiring. The recovery from a bear market may create opportunities for new growth cycles as investors re-enter the market at lower prices, ultimately reshaping future economic landscapes.

Related terms

bull market:

A bull market is the opposite of a bear market, characterized by rising prices and strong investor confidence.

recession:

A recession is an economic decline typically defined as two consecutive quarters of negative GDP growth, often leading to higher unemployment and reduced consumer spending.

market correction:

A market correction is a short-term decline in stock prices, usually defined as a drop of 10% or more from recent highs, often seen as a natural adjustment before potential recovery.