A bear market is a phenomenon at which security prices fall 20 percent or higher from recent highs during widespread pessimism and negative investor sentiment.

Usually, bear markets are associated with declines in an overall market or index like the S&P 500. However, individual securities or commodities can be considered to be in a bear market if they experience a plummet of 20 percent or more over an extended period of time, usually two months or longer. 

Secular and Cyclical Bear Markets

Bear markets can last for some years to only several weeks. A secular bear market can last anywhere between 10 to20 years. And it is characterized by lower than average returns on a sustained basis. It’s possible to witness rallies within bear markets where stocks or indexes rally for a period of time. However, the gains are not sustained and the prices reverse to lower levels. 

A cyclical bear market, on the other hand, can last anywhere from a few weeks to several years. 

Bear vs. Bull 

The term bear market is the polar opposite of a bull market, which is a market in which prices for securities are rising or are expecting to rise. It is named after the way in which a bear attacks its prey – swiping its paws heavily downward. This is why markets with falling stock prices are called bear markets. 

Similar to the bear market, the bull market is named after the way in which the bull attacks – by thrusting its horns up into the air. 

Causes of a Bear Market 

The causes of a bear market usually differ. However, in general, a weak or slowing or sluggish economy will bring with it a bear market. The signs of a weak or slowing economy are usually low employment, low disposable income, weak productivity, and a drop in business profits. 

Additionally, any intervention by the government in the economy can also trigger a bear market. For instance, changes in the tax rate or in the federal funds rate can lead to a bear market. 

In a similar manner, a drop in investor confidence may also signal the onset of a bear market. When investors believe that something is about to happen, they will take action, which is probably the selling of assets to avoid losses. 

Phases of a Bear Market

Bear markets usually have four different phases. The first shows high prices and high investor sentiment. However, in this phase, investors are beginning to drop out of the markets and take in profits.

During the second phase, stock prices begin to fall steeply, trading activity and corporate profits start to drop. Economic indicators that may have once been positive begin to become below average. Some investors begin to panic as sentiment starts to fall. This is referred to as capitulation. 

The third phase can witness speculators start to enter the market, therefore increasing some prices and trading volume. 

During the fourth and last phase, stock prices continue to drop but slowly. As low prices and good news start to appeal to investors again, the bear market starts to give way to bull markets. 

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