How is a bear market defined
Defining a Bear Market
a bear market is a period of time when
the broader stock market declines by a
significant amount and while the name
might seem scary a decline in the
broader stock market is a normal part of
the investing process in this video
we'll further define a bear market and
examine typical characteristics will
also discuss strategies you might
consider to help reduce risk during a
bear market there are generally two
types of bear markets minor Corrections
and full-fledged bear markets a
correction is when the broader stock
market such as the SP 500 index declines
ten percent from its highs Corrections
are common and are typically seen
several times per year Corrections occur
for different reasons such as a negative
economic report or poor earnings
guidance issued by a high profile
company a full-fledged bear market is a
more significant to climb this type of
bear market occurs when the sp500
declines 20 percent or more from its
recent highs however bear markets
generally occur infrequently for
instance from 2000 to 2013 the sp500
experienced two bear markets a bear
market is usually associated with
investor pessimism toward the future of
the economy corporate profits and stock
prices in general sometimes a bear
market might be a precursor to a
recession a recession is defined by two
consecutive quarters of negative gross
domestic product which is a broad
measure of the economy a recession is
typically characterized by decreasing
consumer spending and increasing
unemployment in addition to a declining
stock market some of the worst bear
markets in history ultimately led to a
recession for example there's the famous
crash of 1929 during this bear market
the broader stock market declined almost
90% over the course of the Great
Depression
a more recent bear market includes the
dot-com bubble in 2000 this time the
broader stock market declined about 47%
leading to a recession another recent
example is the financial crisis of 2008
during this bear market the broader
stock market declined more than 50
percent leading to a severe recession
but these three examples of bear markets
are extreme in fact since 1929 the
average bear market resulted in a 38%
decline in the broader stock market now
that you know some characteristics let's
discuss how investors might confirm a
bear market after the broader stock
market declines 20% from recent highs
investors can use a drop below yearly or
multi-year lows as confirmation another
way to help confirm a bear market is to
apply the 200-day moving average to a
broad market index such as the S&P 500
some investors view it drop below the
200-day moving average as confirmation
after confirming a bear market investors
might apply certain strategies to reduce
the risk of stocks declining further for
example investors might sell a portion
of a stock portfolio if the broader
market breaks down to yearly or
multi-year lows or if the S&P 500 drops
below its 200-day moving average but
whether an investor chooses to sell
stocks or not depends on the investor's
time horizon among other factors keep in
mind that since 1929 the broader stock
market has needed an average of five
years to recover from a bear market so
if an investor's time horizon is less
than five years it might be reasonable
to consider reducing risk by selling
stocks
conversely if an investor's time horizon
is greater than five years it might be
reasonable to consider doing nothing but
simply hold existing stock positions
some investors might even view a bear
market as an opportunity to pick up new
long-term stock investments at favorable
prices remember a bear market is a
normal part of the investing process in
fact it typically occurs about once
every five to ten years and as long as
investors maintain stock portfolios that
align with their time horizons a bear
market is manageable it may even lead to
potential opportunities
you
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