A 16th-century proverb says it’s not a good idea to sell a bear’s skin before it can be caught. This is one of the reasons why Wall Street types often refer to people who sell a stock as a “bear” when the price of the asset declines.
What is a Bear Market?
The term “bear market” refers to a market where the value of various assets such as stocks and commodities is declining. On the other hand, when assets rise over time, it is called a “bull market.”
The term bear market refers to a period when the broad market index, known as the S&P 500, falls by 20 percent or more. A bear market is a market in which the index falls by 20 percent or more. On the other hand, a bull market is a market in which the index rises by 20 percent or more over time.
Indices are unmanaged, and investors cannot invest directly in an index. Unless otherwise noted, the performance of indices does not account for any fees, commissions, or other expenses that would be incurred. Returns do not include reinvested dividends.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered representative of the stock market in general. It is a market value-weighted index with each stock’s weight in the index proportionate to its market value.
Since the S&P 500’s peak on January 3, it has lost about 24 percent. This means that the index, composed of companies commonly known in the US, has entered a bear market. Despite the broad market’s decline, many analysts still refer to it as a bear market. For instance, in March 2020, when the S&P 500 fell 34 percent weeks after the coronavirus pandemic, many analysts still referred to it as a bear market.
A correction is a type of bear market that occurs when asset prices decline by around 10 percent to 20 percent from their previous peak. According to some analysts, there have been 26 bear markets within the S&P 500 over the past 90 years.
The average duration of these bear markets was 289 days, with a drop of around 36 percent. The longest was in 1973-74 and lasted over 600 days. There have only been 24 distinct bull markets in the S&P 500. Despite their shorter duration, these markets usually last for several years.
Why Do They Matter?
Although a bear market doesn’t necessarily signal a recession, it can be a sign that the economy is about to enter a recession. Since the Second World War, there have only been three bear markets that didn’t trigger a recession. The impact of a bear market on an individual’s retirement account is typically severe, especially for recent retirees.
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