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9 Minute Read

What Is a Bear Market? And How Does It Impact You?

9 Minute Read

What is a Bear Market?

Some nights you might turn on the news, hear experts start talking about “bears” and “bulls” and wonder if you accidentally switched the channel to ESPN or National Geographic.

Don’t worry, you’re (probably) still on the right network—sometimes economists will use Wall Street lingo like “bear markets” and “bull markets” to describe how the stock market is doing.

And if you’ve been keeping up with the news lately, there’s been a lot of talk about bear markets in the middle of this coronavirus outbreak. But what exactly is a bear market?

OK, I’m going to put on my coaching hat and dive into what a bear market is, why it matters, and how it might impact your investments. Ready? Let’s do this! 

What is a bear market?

A bear market happens when stock prices drop by 20% or more from their recent highs. As a result, investor confidence is low and there’s a growing sense of pessimism surrounding the economy and the stock market. Why is it called a bear market? The term comes from the way a bear attacks its prey by swiping its paws downward.

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When we’re in a bear market, that means the stock market is in the middle of an economic downturn that could last anywhere from several weeks to a couple of years. Here’s what might be happening in the middle of a bear market:

  • Stock prices keep falling and rising. Once we’re in a bear market, things can get really bumpy, really fast. Volatility is pretty common in a bear market, which just means stocks can go up and down pretty rapidly.
     
  • Investors are worried and panicked. When investors are afraid to take on risks and worried about losing money, that’s another sign that the bears are on the prowl and the bulls have left the building.
     
  • Unemployment starts to rise. A bear market usually means a slowing economy, which also means that businesses are less likely to hire new people or, even worse, forced to start letting people go.
     
  • Consumer confidence drops. People usually go into conserve mode in a bear market, either because they’ve lost their jobs and need to focus on taking care of the essentials or because they’re afraid things might get worse. 
     
  • Businesses are struggling. If people aren’t spending money, that means some businesses might struggle to make a profit and remain productive.

A bear market happens when stock prices drop by 20% or more from their recent highs. As a result, investor confidence is low and there’s a growing sense of pessimism surrounding the economy and the stock market.

What causes a bear market?

A bear market can happen for any number of reasons, from a financial crisis (like the housing market collapse of 2008) to a bunch of fearful investors overreacting to some piece of bad economic news. Ironically, fear can sometimes keep a bear market going much longer than the actual thing that caused it in the first place.

Did the coronavirus outbreak trigger a bear market? In short, yes. The Dow Jones and S&P 500, the indexes most investors pay attention to, both went into bear market territory in early March 2020 after fears surrounding COVID-19 sent investors into a panic and sparked a string of losses.1

It took less than a month for the S&P 500 to go from record highs to a bear market—the fastest plunge into bear market territory in history.2  When it was all said and done, stock prices fell by 34% between February 19 and March 23, before beginning to bounce back in April.3

How often do bear markets happen? And how long do they last?

I’m just going to tell you right now: We will experience bear markets from time to time. It’s going to happen! Since World War II, Wall Street has gone through 13 bear markets (they roughly happen every five or six years) and they usually last about 362 days—just under a year.4  

Now listen, a bear market usually sorts itself out and the economy bounces back pretty quickly. But if stock prices continue to fall, it can trigger a recession. That’s when the economy stops growing for an extended period of time—usually two straight quarters or more of negative economic growth.   

We still don’t know how long this current bear market will last, but it’s important to remember that bear markets and recessions are both normal parts of the economic cycle. The stock market is like a roller coaster—there are going to be ups and downs and plenty of twists and turns in between. But the only people who get hurt are the ones who jump off. So keep your seatbelt buckled and hang on!

Bear market will last, but it’s important to remember that bear markets and recessions are both normal parts of the economic cycle. The stock market is like a roller coaster—there are going to be ups and downs and plenty of twists and turns in between.

What’s the difference between a bear market and a bull market?

A bull market is the exact opposite of a bear market—describing an economy with rising stock prices, high investor confidence and lots of optimism. If we’re in a bull market, that means Wall Street is charging ahead with stock values going up by 20% or more from recent lows. If people are saying we’re in a bull market, that means times are good—and investors are expecting the good times to keep on rolling! 

Thankfully, bull markets usually last longer than bear markets do. Since World War II, the average bull market has lasted for around four-and-a-half years.5 In fact, after the 2008 financial crisis and the recession that followed, investors enjoyed the longest bull market run in history—which lasted just over 11 years until the coronavirus brought it to a screeching halt.6  

 

 

An easy way to remember the difference between a bull market and a bear market is to think about how each animal attacks. While a bear slashes her claws downward, a bull charges forward and thrusts his horns upward. See? All those nature documentaries you watched when there was nothing else on TV are finally paying off!    

How is a bear market different from a stock market correction?

When Wall Street is on edge, you might also hear the term stock market correction thrown around—but don’t get that confused with a bear market. A correction is a sudden 10% drop in stock prices from a recent high, but it doesn’t last very long—usually no more than two months. Think of a correction as a “hiccup” in the stock market.

So if we’re in a bear market, that means the stock market has already gone through a correction—and then stock values dropped by another 10% or more to put Wall Street in bear market territory.

What should you do during a bear market?

Bear markets can be pretty scary. That’s because it’s hard to predict when they’ll happen, how long they’ll last, or how badly they’ll hurt your investment portfolio. And it’s never easy to see the investments in your 401(k) or Roth IRA take more beatings than Rocky Balboa in a boxing ring.

But it’s important to remember that they are part of the natural cycle of the stock market. And guess what? Just like the Italian Stallion, the stock market always bounces back up. You just have to stay calm and ride it out. Here are four things you should do whenever we find ourselves in a bear market:

1. Don’t make decisions based on fear.

Fear is a terrible financial advisor, and the absolute worst thing you can do during an economic downturn is panic and take all the money out of your 401(k) and other investment accounts. Don’t do it. By pulling out of your investments, the only thing you’re doing is locking in your losses. Take a deep breath, or maybe get on the phone with an investment professional, and remember that this too shall pass.  

2. Focus on the long-term.

When you’re investing and saving for retirement, remember that you’re running a marathon, not a sprint. You need to zoom out of the current situation and focus on the long-term.

3. Protect the “Four Walls.”

In a bear market, there can be a lot of uncertainty about your job and your income. If you happen to find yourself out of work during this time, make sure you get into conserve mode and take care of what we call the Four Walls—that’s your food, utilities, shelter and transportation. It’s okay to stop investing temporarily in order to keep the lights on and put food on the table.

4. Keep investing for retirement.

If your job situation is stable and you’re out of debt with a fully funded emergency fund, then stay the course and keep investing. The way I see it, a bear market means you’re getting mutual funds at a discount! Keep investing 15% of your gross income into retirement and stay consistent with your investing strategy.

Work With an Investment Pro     

When the stock market is struggling and everyone around you is running around like Chicken Little, it’s easy to get caught up in the hysteria yourself. That’s why I always recommend having an investment professional as part of your dream team, someone who can guide you through tough economic times.

The SmartVestor program can help you find an investment pro in your area who can sit down with you and help you choose the right mutual funds to invest in. You need someone who can help you stay focused on your long-term goals and make smart choices that will set you on the path toward your retirement goals.

Find a SmartVestor Pro today!

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