What Is a Bear Market?

A bear market occurs when any market experiences an extended period of price declines. When a bear market condition occurs, the prices of asset classes within the market fall by 20% or more, leading to widespread dismay, panic selling, and a loss of investor confidence.

This market condition is often associated with declines in an overall market index, like the first and most famous bear market during the Great Depression, the dot com bubble in 2000, and the housing crisis of 2007–2008. The fallout from a bear market may accompany general economic downturns such as a recession, economic slowdown, and higher unemployment.

Summary of Important Points

  • A bear market is when a market suffers a prolonged price decline across asset classes.
  • It is a market condition capable of lasting for days, weeks, or even years.
  • When a bear market condition happens, stock and securities prices may fall by 20% or more, leading to widespread pessimism and a loss of investor confidence.
  • Bear markets can be cyclical or secular.
  • Bear markets are often associated with declines in an overall market index and are trigged by exploding market bubbles, global crises, or economic downturns like a recession.
  • The bear market occurs in four critical phases before reverting to a bull market.

What Causes a Bear Market?

The bear market condition can occur due to the following:

  • Market bubbles breaking
  • Geopolitical or financial crises
  • Slow economic growth.

There is usually a strong correlation between asset prices in a market and consumer confidence. Therefore, pandemics, recessions, overly contractionary monetary, or fiscal policies could cause mass panic, triggering a bear market. On the other hand, the bull market is triggered by morale-boosting events like low unemployment and prospering economies.

Bullish or bearish market trends don't depend on investors' knee-jerk reaction to a particular event; rather, they are products of an asset performance over the long term.

The Four Phases of a Bear Market

The bear market consists of four stages where investors contend with accumulation, markup, distribution, and decline. These four bear market phases are critical for investors and, if identified early, could help in making the right market decisions.

The four bear market phases are as follows:

1. Warning Phase

The warning phase is the first step in a bear market, usually denoted by high prices and optimistic investor sentiment. Investors initially ignore the onset of a bear market and mistake it for ordinary day-to-day fluctuations. During this period, market prices may witness a 7-13% free flow decline. However, towards the end of this phase, investors begin to drop out of the markets precipitously, taking whatever profits they can.

2. Panic Phase

In the second phase, panic sets in, stock prices fall sharply, and investors begin to capitulate. The overall market sentiment shifts into fear as investors panic sell. Trading activity and corporate profits decline, and positive economic indicators go below average.

3. Distribution Phase

In this phase, when panic selling begins to subside, investors begin to contend with the reasons why the market recorded a hefty price decline. The stage is volatile, turbulent, and usually lasts the longest out of the other phases. Speculators enter the market during this period and may cause an increase in trading volume, triggering temporary price rallies on some asset classes.

4. Decline Phase

At this stage, investors begin to anticipate improvements in the market. Although asset prices continue to drop slowly, things may change gradually with good news. The positivity improves investors' sentiment and attracts new investors into the market. This stage is the final phase of a bear market, and as the market gets populated with investors again, the cycle points to the return of a bull market.

How Long Do Bear Markets Last?

There are two periods to consider when it comes to a bear market: how long it takes to enter a bear phase and how long it takes the market to recover.

Bear markets can be either cyclical or long-term. The former can persist for a few weeks or months, while the latter can last for extended periods. Long-term bear markets are also called secular bear markets and can last for decades. There may be short price rallies within the secular bear market, but these are unsustainable gains as asset prices usually return to their normal lows.

From 1900 through 2013, there were about 32 bear markets; that is one every 3 ½ years. The average bear market lasted 15 months, with stocks falling at a significant 32% rate. However, the most recent bear market lasted only a few months. It started with the global coronavirus pandemic in February 2020, sending the DJIA down 38% from its all-time high. This downtrend was short-lived as the NASDAQ and S&P 500 recovered, reaching new all-time highs in August.