A bear market is a period when stock prices fall by 20% or more from recent highs, typically accompanied by widespread investor pessimism and negative sentiment.
Characteristics of a Bear Market:
- Declining Prices: Stock prices trend downward for an extended period
- Low Trading Volume: Reduced buying activity, more selling
- Investor Pessimism: Negative sentiment about market and economic conditions
- Economic Weakness: Often accompanied by recession or economic slowdown
- Media Negativity: Financial news tends to be negative and discouraging
What Causes Bear Markets:
Economic Recession: Declining GDP and corporate earnings High Interest Rates: Expensive borrowing costs reduce investment Geopolitical Events: Wars, political instability, or major crises Market Bubbles Bursting: Overvalued assets returning to realistic prices Inflation: Rising prices reducing consumer purchasing power
Bear Market Phases:
1. Distribution: Smart money starts selling while sentiment is still positive 2. Public Participation: More investors panic and sell as prices fall 3. Capitulation: Final wave of selling, often marking the bottom
Investment Strategies:
Dollar-Cost Averaging: Continue investing regularly to buy at lower prices Value Investing: Look for quality companies trading at discounts Defensive Stocks: Focus on stable companies in essential industries Cash Position: Keep some cash available for opportunities
Historical Perspective:
Bear markets are a normal part of market cycles. While painful, they often present long-term buying opportunities for patient investors. The average bear market lasts about 14 months.