The term “bear market” comes from the way bears attack, swiping their paws downward at their prey – similar to falling stock prices. This name originated in the early 1700s London stock market and contrasts with “bull market,” named after a bull’s upward thrusting motion. Traders who bet on falling prices are called “bears,” while those expecting price increases are “bulls.” The animal symbolism has stuck around for centuries, reflecting the market’s wild nature.
Quick Overview
- The term originated in the early 18th century London stock market, reflecting historical trading practices and market terminology.
- Bears attack with a downward swiping motion, which symbolically represents falling stock prices in the market.
- The name comes from an old proverb about selling a bear’s skin before catching it, relating to speculative trading.
- Traders who bet on falling prices were called “bears,” and the term eventually described the entire declining market condition.
- The term contrasts with “bull market,” as bulls attack upward, representing rising prices, while bears swipe downward for falling prices.
Panic and pessimism often mark a bear market, which occurs when stock prices fall considerably over an extended period. The term “bear market” specifically refers to a drop of 20% or more in stock prices, usually lasting for at least two months. During these times, investor confidence is low, unemployment tends to rise, and the overall economy shows signs of weakness. Average duration suggests these downturns typically last around 289 days.
The term’s origin is quite fascinating, dating back to the early 18th century London stock market. It’s believed to come from the way a bear attacks its prey with a downward swiping motion. This contrasts with a bull market, named after how a bull attacks by thrusting its horns upward. There’s also an old proverb about selling a bear’s skin before catching the bear, which may have influenced the term. Over time, people started calling speculators who bet on falling prices “bears.”
When a bear market takes hold, investors typically become very cautious about putting their money into stocks. This leads to more selling, which pushes prices even lower. Market indexes display red figures during these periods, indicating widespread weakness. While trading might increase at first due to all the selling, it often slows down as more people lose confidence in the market. Sometimes there are brief upward price movements, called relief rallies, but the overall trend continues downward. The same patterns occur in cryptocurrency markets, where panic selling can intensify market declines.
These markets can have a significant impact on investors’ portfolios. Between 1900 and 2013, there were 32 bear markets, compared to 123 smaller market corrections. The average bear market lasts about 15 months, and during this time, it can erase years of investment gains. While some traders try to profit from falling prices through short-selling, many investors simply wait out the downturn.
Bear markets don’t last forever. They’re often followed by bull markets, where prices rise over extended periods. During bear markets, the economy usually struggles, and there might be political uncertainty or other major market problems. One notable example is the Great Depression bear market of the 1930s, which remains one of the most severe in history.
It’s worth noting that while bear markets can be scary, they’re a normal part of the market cycle. Just as bears emerge from hibernation, markets eventually recover and begin growing again. However, each bear market is unique, and there’s no way to predict exactly how long one will last or how severe it will be.
Frequently Asked Questions
How Long Does a Typical Bear Market Last?
A typical bear market lasts around 9.5 months, though durations can vary widely.
The shortest ones have wrapped up in just three months, while others have dragged on for several years.
Since 1928, the average length has been 349 days.
Modern examples show this range – the 2020 COVID-19 bear market lasted only 33 days, while the 2007-2009 financial crisis bear market stretched for 27 months.
Can Individual Stocks Experience Their Own Bear Markets?
Yes, individual stocks can experience their own bear markets, even when the overall market is doing well.
A stock enters its own bear market when it drops 20% or more from its recent high price and stays down for an extended period. This often happens due to company-specific problems like poor earnings, management issues, or industry challenges.
For example, Meta’s stock fell 76% in 2022, while Netflix dropped 77% from late 2021 to mid-2022.
What’s the Difference Between a Correction and a Bear Market?
The main difference between a correction and a bear market is how much the market drops. A correction happens when there’s a 10-20% decline, while a bear market occurs when there’s a drop of 20% or more.
Corrections are usually shorter, lasting a few months, while bear markets tend to stick around longer, averaging about 11 months.
Corrections happen more often and typically bounce back faster than bear markets.
Do Bear Markets Always Lead to Economic Recessions?
No, bear markets don’t always lead to economic recessions.
While they’re often connected, it’s not a guaranteed relationship. Historical data shows that about half of bear markets since World War II have preceded recessions.
Sometimes, the stock market can recover without the broader economy falling into recession. Other times, both events happen together, like during the 2020 COVID-19 pandemic.
Each situation depends on various economic factors.
Which Sectors Tend to Perform Better During Bear Markets?
During bear markets, defensive sectors typically hold up better than others.
Consumer staples companies, which make everyday items like food and toiletries, tend to maintain steady sales.
Healthcare stocks often stay stable since people need medical care regardless of the economy.
Utilities and telecom companies usually keep generating consistent income.
Companies that pay regular dividends also tend to perform relatively well, as they provide ongoing income to investors during market downturns.
