A bear market is a prolonged period of price declines in a stock or entire market, usually of 20 percent or more from a recent high. Investors typically track the world’s major indexes like the S&P 500 and the Dow Jones Industrial Average to see when they enter bear market territory.
Individual stocks or asset classes can also enter a bear market if they experience price declines of 20 percent or more. The good news is that bear markets do not tend to last long. According to the Schwab Center for Financial Research, the average bear market lasts only around 15 months.
What is a bear market?
There is no exact science for distinguishing or recognizing a bear market, but market watchers generally refer to a decline of 20 percent or more as a bear market.
Bear markets often occur in the period before an economic downturn, and they largely indicate that investors are starting to pull back. If there is a higher ratio of risk-averse investors to risk-tolerant, this can also often be considered a bear market, or “bear-market territory.”
Conversely, in a bull market, investors charge ahead and often buy at a rapid pace. When investors start to hear that markets could be headed for a bear market or into bear market territory, it’s important to take notice and be ready to adjust your investments, if needed.
Bear markets often signal recessions but can sometimes occur in the midst of longer-term bull markets, representing a temporary lull. Since it’s difficult to discern which way markets will swing and when, keeping an eye on your investments is all the more important.
Bear markets could be caused by an overheating of the economy via runaway inflation, political unrest that bleeds into markets, overextended consumers or some other cause entirely.
How bad are bear markets?
Although investors fear bear markets, they are fortunately short-lived in many cases.
As mentioned above, the average bear market lasts about 15 months. Meanwhile, the shortest bear market in history lasted just one month, occurring in…
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