What Is a Bear Market? - MagnifyMoney
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What Is a Bear Market?

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If you’ve ever been camping, you know that the occasional bear could creep into your campsite, ready to make a meal out of your food stash. The same is true with investing: Every now and then, a bear market can take a bite out of your wealth.

A bear market is a period when the stock market is down significantly from recent record highs. But there’s no need to call the park rangers. Instead, we’re here to help you navigate these perfectly normal (and potentially scary) market cycles and equip you with tips on handling a bear when one comes along.

Definition of a bear market

When the stock market declines 20% or more from recent market highs for at least two months, that’s the definition of a bear market. That decline is typically measured using broad market indexes, such as the S&P 500 or Dow Jones Industrial Average.

So, why do these big declines occur? The simplest answer is that investors feel pessimistic about the economy’s direction. As a result, they stop buying stock and instead start selling their stock holdings, which causes stock prices across the board to decline.

Some factors that can cause economic pessimism include:

  • Fear of inflation. When inflation increases the cost of living, investors might prefer more cash in the bank than in the market.
  • Rising interest rates. To rein in inflation, the Federal Reserve often raises interest rates — this can cool inflation but also make borrowing more expensive.
  • Slowing economic growth. Times of low unemployment tend not to bode well for the stock market.
  • Social and political events. Everything from new pandemics to new presidents can impact the markets and whether investors aim to buy or sell.

How long do bear markets last?

While there’s no way to tell exactly how long a bear market will last, it’s important to know that they are common occurrences.

Overall

  • 16 bear markets. The number experienced in the U.S. between 1956 and 2022.
  • 11 months. The average duration of the 15 bear markets before 2022.
  • 30.3% decline. The average market decline during the 15 previous bear markets.

Shortest

  • Just over one month. This bear market was at the onset of the COVID-19 pandemic in 2020.

Longest

  • 31 months. This bear market was during the dot-com bubble between 2000 and 2002.

Smallest decline

  • Roughly 20%. This includes multiple bear markets between 1956 and 2022.

Largest decline

  • 56.8%. This was during the mortgage housing crisis between 2007 and 2009.

Now, for some good news: In nearly every instance, the subsequent recovery was longer than the bear market it followed. For example, the average recovery period was 19 months, compared to the 11 months for the average bear market — plus, some recoveries lasted as long as four to six years.

Bear market vs. market correction

Market corrections are like bear cubs: They might not steal your entire picnic basket, but they could swipe an apple pie.

Market corrections happen when the stock market declines by more than 10% from its recent high but less than 20%. And the good news is that most market corrections recover before becoming full bear markets.

We’ve experienced 24 market corrections since 1974, and only five became bear markets. In most cases, the stock market recovers and investors quickly earn back their losses.

Market correction

  • A stock market decline of more than 10% and less than 20%.
  • In most cases, the stock market recovers quickly.

Bear market

  • A stock market decline of 20% or more.
  • Lasts for an average of 11 months and has been as long as nearly three years.

What should you do during a bear market?

While market downturns are inherently unpredictable, there’s plenty you can do to protect your investments while the markets play out the current cycle.

Do…

  • Focus on your overall financial plan. Your investments are an important piece of that plan, but they’re still just one piece.
  • Keep saving for retirement. During bear markets, you get to buy at a discount, which can fuel your future nest egg when the market recovers.
  • Review your asset allocation. If losses rattle you, it could be time to reassess your risk tolerance and shift to a less aggressive asset mix.
  • Rebalance your portfolio. Rebalancing can lower your risk exposure if the bear market has shifted your portfolio beyond your target asset allocation.
  • Look for tax-loss harvesting opportunities. If you invest through a taxable brokerage account, your market losses could translate to savings come tax time.

Don’t…

  • Change your long-term investment strategy. A well-constructed portfolio is designed to endure most market cycles.
  • Panic. Obsessively tracking stock prices and worrying you’ll lose money can lead to emotionally-driven decisions with poor timing and outcomes. But despite that bear digging through your picnic basket, a calm head is best.

The bottom line

In a bear market, you might lose a bit of your picnic today, but you’ll walk away with your plan intact and a good story to tell. But, of course, your ability to weather any market movement has everything to do with having a well-crafted financial plan and the proper asset allocation for your goals.

If you’re unsure about your current asset allocation, consider talking to a financial advisor. We can even help you figure out how to find your perfect financial advisor fit. You can find an advisor who consults hourly or one to help manage your assets through every market cycle. That extra set of eyes might be just what you need to stop stressing about your investments and sleep well at night.

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