The saying “the true investment challenge is to perform well in difficult times” correctly explains the term BEAR MARKET. To explain it simply it refers to the market where the price of the securities goes down by 20% or more. 20% is just a benchmark. It can be associated with the entire market or even just the index like the S&P 500 or even just securities. It can also lead to economic downturns like a recession.
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It can’t be certainly defined as to how long it can go on for but it ranges from weeks to sometimes even months or maybe years too. A bear attacks its prey by swiping its paws downwards which is very similar to the way the bear market works and hence the name has come from the animal.
Characteristics of A Bear Market
- The value of the company on paper becomes less due to the falling prices.
- The investors expect the worst of the situation hence stop buying more and sell the already owned investments.
- Investors have lost confidence in the market so their profits have reduced or become stagnant.
- There is a general agreement that the market has stopped growing and won’t do so anytime soon. Thus, investors move their money to safer assets like treasury bills.
- The cash inflow and outflow have become very tight and hence there is a risk of deflation.
What causes a Bear Market?
There are many causes that can lead to a bear market. A sluggish, weak, or slow-moving economy may be the cause for a bear market. An economy can be called weak or sluggish when there is low employment, weak productivity, or a drop in business profits. Other causes can be irresponsible lending, oil price movements, and excessive borrowing.
Types of bear market
- Cyclical Bear market occurs at the end of every business cycle fluctuation in an economy, usually occurs every 7-10 years. The market needs to adjust after a prolonged period of boon which is characterized by extensive growth rates. A cyclical market is a common occurrence as the stock prices fall after a very good market period. The financial crisis of 2008-2009 is the best example to describe a cyclical bear market.
- Structural Bear Market is caused by major bubbles or imbalances in the economy. Businesses have taken huge debts as banks have given loans to the worst of worst candidates. On average, there is a 57% decline in prices and a 42-month recovery. The recovery period is so long because the businesses have got back the capacity to spend more but the banks are damaged by lending a lot previously hence there is a period of stagnation, for the banks to heal. The most obvious example of this type of bear market is the build-up of household debt during the Global Financial Crisis.
- Event-driven Bear Market is when the price declines due to the occurrence of a certain event. The price declines are relatively lower of 29% with a recovery of 9 months. The current situation of the global pandemic can be taken as an example or even the 9/11 attacks in Mumbai.
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- The most famous example of a bear market would be The Great Depression which occurred due to the stock market crash of 1929 where thousands of Americans lost their jobs, homes, and well-being. It had not only affected America but the entire world. It would be silly to think that every bear market can turn into the great depression.
- The Dot Com Burst is another example where countless tech company’s shut down after the dot com burst in the early 2000s.
- The Housing Market Crash which took place in 2008 is still a fresh tragedy for some like it happened yesterday. Millions of people were left jobless, homeowners had lost their houses and consumer spending fell.
No one is glad if the bears emerge on Wall Street, but they are an inevitable fact of the financial markets. One always needs to hit rock bottom in order to reach great height thus bear market is a great way to teach an individual that.
Author -Sanjana Rau
About the author- Started my journey of self even when the odds were against me, keen observation, a cool temper, and sports worked the best for me.