A bear market is a period of consistently falling stock prices. Generally, a bear market is characterized by a 20 percent or greater decline in stock prices extending over a time frame of two months or longer. The shift in prices is measured using the movements of a major stock index, such as the Dow Jones Industrial Average or Standard & Poor 500 Index.
A bear market is different from a correction, which occurs when stock prices drop by 10 percent over a shorter time frame, usually less than two months. The average bear market lasts 1.4 years, with an average cumulative loss of 41 percent, according to data collected by First Trust Advisors.
What Happens in a Bear Market
Bear markets are marked by low levels of investor confidence and high levels of pessimism. As investors continue to lose confidence in stocks, they may begin to sell securities as a hedge against potential losses. This behavior can trigger further declines in stock prices, which in turn may impact trading volume and dividend yields.
After trading activity hits a trough, it may begin to increase again as speculators venture back into the market to capitalize on lower prices. If stocks begin to gain momentum through reinvestment, a bear market can shift into a bull market.
What Triggers a Bear Market
Bear markets can be triggered by a number of factors. Major economic shifts, including changes to the federal funds rate or fluctuations in oil prices, can influence the development of a bear market. Instability in foreign markets and political conflicts on a global scale may also come into play.
The primary concern for investors in a bear market is minimizing losses. To accomplish this, many investors may attempt to time the market when buying and selling, but that’s an inexact science at best. A bear market is generally considered to be over once stock prices move upward again by 20 percent or more.