A Bear Market: Everything You Need to Know

A Bear Market: Everything You Need to Know

07/26/2022 | Investment & Retirement

A Bear Market: Everything You Need to Know

We live in increasingly difficult and confusing financial times. Over the past year, consumers have been forced to deal with the impact of price inflation and higher prices for common products and services, rising interest rates, and greater volatility in the stock market. 

Now, financial experts are saying that we’re officially in a bear market. But what exactly does that phrase mean? When will the stock market recover? And what should you do in response to these conditions?  

What is a Bear Market?

Price changes in the stock market have historically been represented by two distinct animals: bulls and bears. Bears (and a bear market) represent falling prices and negative momentum, while bulls (and a bull market) represent rising prices and positive momentum.

Accordingly, a bear market is one in which prices are falling. Investors are pulling out of the stock market due to concerns about volatility or overall economic conditions, resulting in subsequent price drops that may lead to stagnating financial performance.

“Bear market” is a somewhat informal term. Economists sometimes have different definitions and measurements that indicate a bear market, but these are mostly arbitrary. Generally speaking, a bear market can be used to describe any period with prolonged price drops in the stock market.

Why Are We Currently in a Bear Market?

There are two ways to answer this question.

First, we can address how we know that we’re currently in a bear market.

Second, we can explore the factors that have led to this market decline.

First, we know that we are in bear market territory because we've seen consistently falling prices in the stock market. One of the most commonly used indicators of a bear market is recording a close of 20% below an all-time high; this occurred mid-June according to S&P Dow Jones Indices and as reported by CNBC.1

Second, as with most economic changes, the bear market has been influenced by a variety of factors. High inflation, a slowdown in the Chinese economy, the ongoing war in Ukraine, higher energy costs, and higher interest rates all have a significant impact on the market. Investors are growing more concerned about the future, so they’re increasingly pulling out of the stock market. This movement triggers falling prices.

How Does a Bear Market Impact You?

For starters, understand that a bear market isn’t necessarily the same thing as an economic recession (though the two concepts can be related). An economic recession is a period of time in which economic activity falls or stagnates. It’s entirely possible for stock prices to drop temporarily, without there being a correlative fall in economic activity overall. However, a bear market, if sufficiently prolonged, could also be a harbinger of an economic recession.

For the most part, a bear market will only directly impact your investments. The bear market isn’t responsible for higher interest rates or higher prices of consumer goods.

If you’ve been investing for a while, you’ve likely seen this bear market wipe out a significant chunk of your savings. There’s a chance these conditions will continue, and your portfolio will continue to suffer losses.

However, there are two important things to note here.

First, bear markets are usually temporary and short-lived. If you don’t sell, you won’t “realize” the losses you’ve incurred thus far. If the market follows historical patterns, it should bounce back to where it was before — and eventually exceed its previous heights. 

Second, many savvy investors see bear markets as an excellent investment opportunity, especially if you’re looking for a long-term investment. Stocks are at record-low prices, effectively presenting a discount to investors.

How Long Does a Bear Market Last and When Will the Stock Market Recover?

Here’s some good news: Most bear markets don’t last an especially long time. The average bear market lasts about nine months, according to Murray Frank, a professor of finance at the Carlson School of Management, and as reported by CBS News.2 However, we’ve recently seen bear markets as short as 33 days and as long as two and a half years. 

It's impossible to predict exactly how long a bear market will last, even for the best financial experts. All we can do is describe what has happened historically. 

Additionally, when the bear market is over, it may take several months or several years for the market to return to pre-bear market levels. Experts also have difficulty predicting when and how this rebound will occur. 

What Do Experts Advise During a Bear Market?

What investment strategies do financial planners advise during a bear market? 

Focus on quality

Bear markets function as a kind of stress test for businesses; businesses with inherent weaknesses often reveal those weaknesses during a bear market and begin to collapse. Focus your investing efforts on quality companies that are built for long-term success and pay especially close attention to business fundamentals. 

Assume you can’t catch the bottom

One sensible strategy is to try to buy stocks when prices have hit their ultimate bottom. There's just one big problem: It’s almost impossible to time the bottom, because nobody knows where the bottom will be. Don't assume that you'll have perfect timing; it’s entirely possible for you to buy in and then experience subsequent price drops. 

Build positions gradually

Use dollar cost averaging (DCA) to build new positions in stocks gradually as the S&P 500 index and Dow Jones Industrial Average begin to move. This way, you won't run as much risk of losing your money to unfortunate timing. 

Rebalance your portfolio

Take the time to assess your risk profile, evaluate what you know about this bear market and rebalance your portfolio accordingly. This is a good opportunity to double-check your target asset allocation and shore up any asset classes that are below your targets. 

Keep investing over time

Panicked investors sometimes stop investing during a bear market because they're concerned about the long-term future of stocks, but this is usually a bad idea, since every bear market we've ever known has eventually returned to normal. You're usually better off continuing to invest gradually over time, averaging out the cost basis of your positions and spending more time in the market.

Navigating a bear market is challenging even for seasoned investors. But you don’t have to go it alone. With United Brokerage Financial Advisors, you can get dedicated attention and personalized advice for your financial situation. Find out more or get started today!  

1 Scott Schnipper, The S&P 500 is now in an official bear market, according to S&P Dow Jones Indices, CNBC, June 13, 2022 – https://www.cnbc.com/2022/06/13/sp-500-is-in-official-bear-market-according-to-sp-dow-jones-indices.html  
2 Heather Brown, What is a "bear market" and how long might it take to recover? CBS Minnesota, June 16, 2022 – https://www.cbsnews.com/minnesota/news/bear-market-explainer/

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