Bear Market: Meaning, Causes and Types

 “Bull market” and “Bear market” are greatly influential economic conditions in the stock market, and the world of finance that dictate global finances. A bull market is that of growth and optimism, whereas a bear market refers to the time of fall when investor confidence goes low and the value of the market goes low. And thus knowing a bear market will provide valuable information to the investor who desires to circulate smooth waters within one’s market drift. This article explains the meaning, causes, and types of bear markets.


What is a Bear Market?


A bear market is the condition when stock prices make a 20% drop from recent tops for at least fifty-two consecutive weeks. It usually lasts for some months but may take many years in extreme cases. Not only stocks are affected, but also bonds, real estate, and commodities. They can be demonstrated as widespread pessimism with reduced investor confidence, lower economic activity, and, in certain cases, recession.


A bear market causes investors to fear losing their money and therefore try to sell the securities. This will automatically force down trading volumes and increase the demand for less-risky securities such as government bonds. Although bear markets carry a stigma, in that they are part of the cycle of economy, they provide investors with an opportunity to invest in undervalued assets.


Causes of a Bear Market

The formation of bear markets bears different economic, political, and social factors. Some of the significant causes include the following.

  1. Economic Slowing Down: The slowing down of the economy is undoubtedly one of the most prominent marks of a bear market. Once the parameters of the economy like GDP growth, corporate earnings, and levels of employment start falling, lower consumer expenditure reduces companies’ revenues and then their stock prices.
  2. Rate Hike: High interest rates make borrowing easy as it is dear. Consumers and businesses will spend less. In general, this can reduce corporate profits and therefore cause the decline of stock prices. Additionally, high interest rates make bonds and savings accounts more attractive as they have remunerative interest yields. All this pushes people to divert funds from stocks into bonds and savings accounts.
  3. High Inflation: High inflation reduces the purchasing power of consumers and firms hence consumer and corporate expenditures are low. These low sales and profits reduce stock prices. Over time, the recessions and depressions caused by inflation will prolong their stay in the stock market.
  4. Political and World Uncertainties: Conflict between nations, trade wars and political hostilities raise uncertainty; any investor abhors risk. Such uncertainty may adversely affect international trading, supply chains and profitability for companies and eventually, the stock markets.
  5. Equities Over: speculation often sets equity prices at unsustainable price. When investors actually realize that the prices do not reflect anything close to what it’s worth, selling begins, and the prices start falling down. This was seen in dot-com bubble 2000, where the price of technology stocks was greatly over-valued that led into a bear market.
  6. Pandemics and Natural Disasters: Such unknown events comprise pandemics like COVID-19 or natural disasters, which totally freeze the functioning of an economy, hence causing reduced consumer spending, stopping businesses, and a tumbling stock values to previously unprecedented lows. This causes a bear market for such unknown events: an unexpected contraction of an economy and the fear of investors.

Types of bear markets

Not all bears are created equal. Each can be varied in length, cause, and severity. Here’s a brief overview of some of the most common categories of bear markets:

  1. Structural Bear Market: A structural bear market is caused by a fundamental change in an economy, normally long-run financial imbalances or economic change. Such markets, like the one seen in 2008 when the housing market collapse triggered the global structural bear market, get steep because the long time required to recover as the economy requires massive adjustment.
  2. Cyclical Bear Market: A cyclical bear market forms as part of normal patterns of growth and decline of the economy. Usually, the period and intensity of cyclical bear markets are generally short and less intense than in a structural bear market. The decline of proceeding into a bear market will occur in a country during a cyclical slowdown. This usually happens when recessions occur with the business cycle. Cyclical bear markets typically end once the fundamental reason that caused the economy to decline has been rectified and growth resumes once more.
  3. Event-Driven Bear Market: This is due to factors such as war, pandemics, earthquakes, or other catastrophe. Event-driven bears are short in terms of duration because the impact is only temporary, and it usually takes a relatively short period for normalcy to return to the economy. That way, the COVID-19 pandemic resulted in an event-driven bear market in the year 2020. The initial knocks were soon recovered through recovery as economies learned and found different ways of handling the given crisis.
  4. Secular Bear Market: This is the secular bear market that takes several years or for ten years with flat or falling stock prices. While a cyclical bear market appears to be a short run economic phenomenon, the secular bear market concerns itself more about a long run economic issue. Such periods are always characterized by meagre investor gains and the incremental recovery of the economy. Secular bears are very few and far between in historical records, but when they do occur, changes can be persistently long-lasting for the psychology of investors and for the policies of the economy.

How to Respond to Bear Market

Sometimes, investors need smart techniques and ideas to deal with the bear market. Here are some steps on how to go through it.

  • Keep Long-term Orientation: Do not keep on deciding based on short term market movement. A long-term goal should be considered as a primary objective and dollar-cost averaging strategies might also be used to acquire assets gradually.
  • Diversify Investments: Invest in a variety of asset classes: bonds, commodities, and international stocks, which will decrease the risk, associated with the bear market and provide a comfortable cushion.
  • Stocks in Defensive Fields: Utility stocks, healthcare, and consumer staples are generally less sensitive to economic fluctuations and will, therefore, be more resilient during the bear market.
  • Stay Informed: Know about what the economic indicators are and, therefore, make you updated with market trends to make proper decisions for an investor.

Conclusion


Bear markets refer to a cycle in the financial sector that brings downward price movement and loss of investor confidence. They can also be caused due to slowing economics, inflation, geopolitical events, and unforeseen crises. 


The knowledge of the types of bear markets-that being structural, cyclical, event-driven, and secular-helps an investor better understand how to characterise them and navigate around the bear traps. 


Admittedly, bear markets are a hard thing to stomach; yet bear markets also signify opportunities for investors looking for long-term solutions and can push a value into strategic investing even in the most trying economic conditions.

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