A bear market is a term given to describe a downward market trend. This is a condition where securities are declining and there is a widespread of pessimism. Investors have a negative view of the markets and continue to sell, making the market go down further. This leads to more pessimism and fear of loss, causing more investors to sell, thus creating a vicious cycle. There is no exact or agreed upon term for what a bear market is, but as a general rule; a fall of 20% or more over a two month period is what most would agree on.
The causes of a bear market can be down to any number of factors. Job losses, banking crisis, lack of economic growth, and reduction in consumer spending. Any situation which will cause investors and the general public to lose faith in the market could trigger it as investors start the cycle of selling stocks out of fear of loss.
There have been a number of bear markets over the decades. One example was the Wall Street crash of 1929 where the Dow Jones Industrial went from a high of 381 on Sept. 3, to a low of 199 on Nov. 13. The next five 5 months saw a rally where the Dow gained back 48% of its value. This gave investors confidence to get back in the market, in what was to become a suckers rally. On the 30th of April 1930, the bottom fell out of the market and the ensuing 27 months saw the Dow drop by 86%.
Another example occurred from about 1973 to 1982. It started with the energy crisis and continued through to the high unemployment era in the 80s.
A bear market is a good time for investors looking to buy stocks at lower prices with the intent to hold for a long term or until the market rises higher. Search for companies that have a solid financial background and will be around for another decade or two. If a company’s share price has fallen due to investors selling shares and not from consistent financial losses, it could be a good buy. Companies still do business and make profits during bear markets.
There is always money to be made in any situation and investing in a Bear market is no exception. There will be opportunities if the smart investor diversifies his portfolio in different areas like options, stocks or bonds.