CONCEPTS OF BEAR MARKET

What is a Bear Market?

➢ A bear market is a financial term used to describe a drop of over 20% in any asset,
although it is most commonly used for stock market indexes.
➢ Bear markets happen fairly often and are part of the economic cycle, but it does
strongly signal a potential economic downturn.
➢ There are many causes of a bear market, such as geopolitical risks and market
bubbles bursting, and each bear market is unique in how far the market may drop
and how long it may last.
➢ During a bear market, there are certain things that investors can do to benefit, such
as investing in inverse ETFs or short-selling stocks.

Bear markets tend to be shorter than bull markets — 363 days on average — versus 1,742 days
for bull markets. They also tend to be less statistically severe, with average losses of 33%
compared with bull market average gains of 159%.

Significance of a Bear Market

Firstly, bear markets occur fairly often and are part of the economic cycle. There isn’t anything
special about the figure of 20%. However, it is a psychological and symbolic hurdle for investors
of the growing risk of an economic downturn or recession. However, a bear market doesn’t
always lead to a recession.
The origin of the term bear market is not certain, but one popular theory is that since bears
are known to hibernate in the winter, a bear market is one where the market is retreating.
The opposite of a bear market is a bull market, where assets, like a bull, are charging.

Bear Market vs Market Correction

A market correction is often incorrectly used as a synonym for a bear market. The key
difference between a bear market versus a market correction is the level of price decline
and the duration.

What Causes a Bear Market

The general causes of bear markets include:

1. Market bubbles bursting

Ex. Tech bubble, U.S. subprime housing crisis

2. Public health crises

Ex. the SARS and COVID-19

3. Geopolitical crises

Ex. the War in Ukraine

4. Slowing economic growth/poor economic data

5. Overly contractionary monetary or fiscal policies
6. Recessions

❖ The first and most famous bear market was The Great Depression.
➢ The term "Great Depression" refers to the greatest and longest economic
recession in modern world history. The Great Depression ran between 1929 and
1941, which was the same year that the United States entered World War II in
1941.

Depending on the duration of the bear market, bear markets can be defined as secular or
cyclical. A secular bear market is driven by forces/influences that cause the price of securities to
fall over an extended period, generally years.

On the other hand, a cyclical bear market is generally caused by normal market volatility
and generally lasts for months.
Stages of a Bear Market

There are typically four stages in a bear market:

Stage 1: Recognition, which is characterized by high (positive) investor sentiment and

high prices. In this phase, investors tend to initially ignore the initial onset of a bear
market and mistake it for ordinary day-to-day fluctuations. At the end of this phase, some
investors will recognize that a bear market is impending and start selling their securities.

Stage 2: Panic, where prices tend to fall sharply, and investors capitulate. Trading
volume tends to drop, economic indicators may start pointing to a worsening economy,
and investor sentiment will drop significantly.

Stage 3: Stabilization, where panic selling begins to taper off and investors start
digesting the reason for the price decline. The stabilization stage is volatile, turbulent,
and usually lasts the longest out of the other stages. There may be rallies that tend to
reverse as market speculators enter.

Stage 4: Anticipation, where prices begin leveling off and finding a bottom. Low
valuations and/or good news start attracting more investors into purchasing securities.

What to Do in a Bear Market

In a bear market, one normally expects to see the following:

● Diminished investor confidence in the financial markets

● High/Unstable interest rates and/or inflation – leading to high volatility
● A decline in initial public offerings (IPOs) – companies tend to avoid going public in a
bear market to avoid depressed company valuations
● A comparative rise in short-selling

However, there are a few strategies to consider in a bear market, including:

1. Short selling securities

2. Purchasing put options
3. Inverse ETFs
4. Leveraged Inverse ETFs

Ultimately, bear markets are a good time to revisit your goals and objectives and remind
yourself of why you’re invested where you are. If your asset allocation feels right, stay the
course. If it feels off, a bear market could be an opportunity to readjust your accounts while
paying less in capital gains than you would during a bull market.