A Brief History of U.S. Bear Markets

What Is A Bear Market?

A pullback is a decline of 5 percent. The term "correction" refers to a decline of 10 percent. A bear market does not occur till the loss is around 20 percent. The declines are difficult to forecast, but you can plan for them. While volatility has been less in the past 10 years, many investors will remember having to endure the recent bear markets and the anxiety caused by watching your balances dip down every month. Anyone who was a part of the market during the 2008 financial crisis will be able to recall the effects it affected their financial wellbeing. However, there is an entire generation of investors who have not experienced the kind of bear market or the lessons from it.

What Causes a Bear Market?

The price of stocks and other securities is affected by various variables, including the level of confidence in investors. A stock's price is likely to decline when investors lose confidence in its results, be it because of the stock or the company backing it or due to the economy's performance in general. Investors might sell their securities to reduce losses; when this occurs in a large number, it could cause a tsunami of selling which can cause prices to decrease. This is supply and demand at play in the most basic sense. In a widespread recession or periods of investing uncertainty, the market may experience price declines. If a particular measure (whether it's the S&P 500, the Dow Jones or the Nasdaq, and so on) can measure a decline of more than 20 percent, the market has entered bear market territory.

When the Bear Comes

A common definition of a bear market is that it is in bear territory when on average is down a minimum of 20% off its peak. However, 20% is an undefined number, just since a 10% drop is an arbitrary standard for the correction. Another way to define a bear market is when investors are more cautious than those who seek risk. This type of bear market could last for years or months in which investors reject speculation and opt for boring, certain bets. Several major stock market indexes across the globe experienced declining bear markets in the year 2018. For instance, in the U.S., in December 2018, the smaller-cap Russell 2000 Index (RUT) reached a low of 27.2 percent lower than its previous highest. The most closely-followed U.S. large-cap barometer, the S&P 500 Index (SPX), was just a few cents shy of the bear market threshold, stopping its slide 19.8 percent lower than its previous high.

Similar to this, the oil market was in a bear market between May 2014 through February 2016. During this time, oil prices dropped continuously and unevenly until they hit an end. Bear markets can take place across sectors and most broad markets. The longest time frame for investors is between now and when they'll need to sell their investments (for instance, when they retire), and, for the longest time frame, the bull markets have risen higher and lasted more than the bear markets.

Recovering from a Bear Market

Bullish markets often follow bear markets. They refer to a rise of 20 percent or more in the stock price. There have been numerous bull markets in the years since 1930. Although bull markets can last for a long time, a substantial part of the gains usually is realized in the first few months of an increase. For instance, it was reported that the S&P 500 bottomed at 777 on October 9, 2002, following the conclusion of a 2.5-year bear market index climbed 15% the following month, which was followed by 34% in the next year.

The S&P 500 was at its lowest level of 676.5 on March 9th, 2009, after a decline of 57 percent. Then, it started an astonishing climb, almost increasing by 48 in the subsequent months. Investors who have considered moving completely off shares during market slumps may want to reconsider their decision, as timing the start of a new bull market isn't easy. Investors who turn to cash during bear market downturns should keep in mind the price of not being able to see the beginning stages of a recovery, which have historically been the most profitable in terms of return per investment.

Investing During a Bear Market

If you're cash-rich, it is possible to look into buying opportunities during the bear market. In the past, the S&P 500 price-to-earnings ratio (P/E) has been significantly lower in bear markets. If investors are more confident, the ratio of P/E typically is higher, which means stock prices are more expensive. Professional investors enjoy bear markets since the prices of stocks are thought of as "on sale." It is not good to cut your retirement account contributions in down markets.