Bearish Market Definition
A bearish market trend refers to an expected downward movement in the prices of securities, assets, currencies, investment instruments, or commodities. In a bear market, investors expect stock prices to drop by 20% or more. The economic slump also presents a buying opportunity for investors.
Falling markets are called “bearish” because the movement in stock prices resembles the attacking pattern of a bear. A bear uses its paws to slap down on its prey. A bearish market can adversely affect the economy. It results in stock market crashesStock Market CrashesA stock market crash occurs when stock prices in all sectors begin to fall rapidly. It is often the result of global factors such as war, scam, or the collapse of a certain industry. In such a crash, panic acts as a catalyst., business stagnation, reduction in job opportunities, and ultimately layoffs.
Table of contents
- The term “bearish market” refers to an investor viewpoint that the particular stock security, commodity, asset, currency, or the entire market will go down in value. The fall in stock prices is 20% or more.
- It is a pessimistic approach —investors speculate about a negative movement in stock prices and take a short position to benefit from it.
- The bear market comprises four stages—recognition, panic, stabilization, and anticipation.
Bear Market Explained
In a bearish market, investors expect a particular stock, instrument, or even the whole stock market to go down in value. If the prediction is successful, investors make a lot of money. However, if this speculative position ends up being wrong, it may cause massive losses. Bear markets result in economic collapseEconomic CollapseAn economic collapse refers to a severe contraction in the economy led by an extraordinary event (financial or structural) which is not a part of the normal economic cycle. It may lead to a decline in national growth, a rise in unemployment, and sometimes social unrest; therefore, it requires government or monetary authorities intervention.—markets go down, businesses stagnate, and many lose their jobs.
Some investors profit from such scenarios. They consider it the right time to buy stocks and instruments—available at a relatively lower price. When the market bounces back, they sell it off.
A bearish view promotes market efficiency— it facilitates short trades on overvalued securities that the market presumes overvalued, thus reflecting investor and market sentiment. But, due to losses caused by the stock market decline, this viewpoint is considered negative.
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Video Explanation of Bearish Market
Bearish Market Stages
The bear market condition is divided into four phases:
- Recognition: At this stage, only some investors foresee a downward market trend. Others fail to realize a bearish trend at this point.
- Panic: This is an alarming phase where the stock prices start falling—investors avoid short-term trading. It leaves a negative impact on investors and the economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society..
- Stabilization: At this point, investors figure out the cause behind falling prices. Yet, there is a lot of confusion among investors—stock prices move up and down aggressively. This stage can extend for months and is seen as the longest period in a bear market.
- Anticipation: Finally, stock prices start rising—the market seems to recover. There is a consistent improvement in the stock prices and economic conditions.
In March 2022, the NASDAQ Composite (NASDAQ 100 Index) showed a bearish movement. The index comprises technology giants like Apple Inc., Microsoft Corp., Amazon.com Inc., and Alphabet Inc.
The index fell by 21% from the highest value in November 2019 (inflation). The economic slump was brought out by the war between Russia and Ukraine. Due to falling stock prices, the listed companies reported a loss of $3.1 trillion in market capMarket CapMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.. However, it is also seen as an opportunity for the investors—to buy low.
The following list comprises bear market scenarios in the US:
|1929||The Wall Street crash led to the Great Depression|
|1971||Latin American Debt Crisis|
|2000||Dot Com Bubble|
Just before the 2007 stock market crashStock Market CrashA stock market crash occurs when stock prices in all sectors begin to fall rapidly. It is often the result of global factors such as war, scam, or the collapse of a certain industry. In such a crash, panic acts as a catalyst., many hedge fund managers took a short positionShort PositionA short position is a practice where the investors sell stocks that they don't own at the time of selling; the investors do so by borrowing the shares from some other investors to promise that the former will return the stocks to the latter on a later date. on the housing market and mortgage-backed securitiesMortgage-backed SecuritiesA mortgage-backed security (MBS) is a financial instrument backed by collateral in the form of a bundle of mortgage loans. The investors are benefitted from periodic payment encompassing a specific percentage of interest and principle. However, they also face several risks like default and prepayment risks.—they feared a fall in value. Due to their bearish view, they gained from the housing market’s catastrophic collapse.
How to Invest in a Bearish Market?
In a failing market, the following strategies are applied:
- A long-term perspective is recommended. Investments should be made for an extended period if the market doesn’t perform as desired.
- To mitigate risks, investors can adopt the dollar-cost averagingDollar-cost AveragingDollar-cost averaging is a strategy of mitigating the volatility risk while investing in the market. It suggests to divide the total amount to be invested in equal parts, and investing those parts at regular intervals.—by investing fixed amounts at regular intervals throughout the bearish period.
- Investors must pick assets or securities that have shown stable performances even during economic downturns.
- The best way to diversify the risk is to add fixed incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments. securities to the portfolio.
Bearish Vs Bullish Markets
The differences between a bearish and bullish perspective are as follows:
|Meaning||Anticipating a decline in the prices of stocks, assets, commodities, currencies, etc. by 20% or more||Anticipating a rise in the prices of stocks, assets, commodities, currencies, etc. by 20% or more|
|Position||Bearish traders take a short position||Bullish traders take a long position|
|Results From||Negative news about the economy, company, market, asset, or security||Positive news about the economy, company, market, asset, or security|
|Economic Impact||Negative effects leading to recession||Positive growth leading to inflation|
|Demand and Supply||In a bear market, demand for securities is low, and supply is high||In a bull market, demand for securities is high, but supply is low|
Frequently Asked Questions (FAQs)
It is a perception. Investors expect stock prices to dip by 20% or more in the upcoming period. It is a negative market trend that can adversely affect the economy.
Bear markets last for 289 days or 9.6 months on average. The longest recorded bear market lasted 61 months during the Great Depression (1929).
The following strategies are used during economic downturns:
– Investors make use of call and put options.
– They plan for the long-term.
– Investors diversify investment portfolios.
– Investors prefer stable securities.
– Investors perform dollar-cost averaging.
The term “bear” market is derived from “bearskin jobbers.” Bearskin jobbers were middlemen who brokered the buying and selling of the bearskin. These middlemen closed deals at a high price even before purchasing the commodity (at a lower price). Parallels can be drawn between aggressive bear skin brokers and contemporary stock market practice of short selling.
This has been a guide to what is bearish market & its definition. We explain its stages, examples and how to invest in a bearish market? You can learn more about it from the following articles –