An investment is said to be in a “bear market” when its value is going down – and specifically when it’s fallen 20% from a recent peak.
Anything from crude oil to olive oil can experience bear – and “bull” – markets, but most investors tend to focus on the biggest US stocks as a guide to the health of markets overall.
A recession is not the same thing as a bear market. An economy that shrinks for two consecutive quarters of the year is said to be in recession.
It’s possible for an economy to experience a recession without its stocks being in a bear market – but a recession can often follow a bear market, which is perhaps why people sometimes confuse the two.
It all comes down to supply and demand: if investors are selling more stocks than they’re buying, then prices will fall until they’re low enough to attract enough buyers. What might cause investors to begin selling in the first place is perhaps more interesting.
Stock prices reflect the average value investors attribute to companies today, based on those companies’ future earnings potential. If expectations for future earnings fall, then so too might stock prices.
And one major reason earnings forecasts fall (and, indeed rise) for several companies at once is the economic growth outlook. If an economy’s growth looks set to slow down – or shrink altogether – spending by consumers and companies is likely to head in the same direction, leading to company profits also growing more slowly or declining.
If investors then slash growth forecasts for several companies at once, it could cause a change of market sentiment – investors may fall out of love with riskier stocks in favor of the comparative shelter of government bonds, for example.
The keen sensitivity of stock prices to changing future expectations means they can sometimes reflect economic slowdowns or recessions before the wider economy actually experiences them.
According to Merriam-Webster, it began with an old proverb warning people not to “sell the bear's skin before one has caught the bear".
By the eighteenth century, the shorthand “bear” was being applied to middlemen who did just that – selling bearskins they had yet to receive and hoping to make a tidy profit if the wholesale price went down by the time they eventually bought them from the trapper.
The name “bear” stuck as a byword for people betting on, and investments exhibiting, negative price moves.
Grey bars indicate periods of US economic recession
There have been numerous bear markets in various investments around the world over the last decade – but the thing investors care about most is the US stock market.
The most recent bear market there lasted between October 2007 and March 2009.
It was triggered by the collapse of the US housing market, which ultimately spiraled into the 2008 financial crisis – and caused several economies, including the US, UK, and eurozone, to fall into recession.
There’s no hard and fast rule for how long bear markets should last. The most recent one in the US lasted 17 months, longer than the 13-month average duration of bear markets since World War II.
A bear market that’s followed by a recession tends to last longer than one that isn’t. For example, in October 1987, the US entered a bear market – stocks fell 31%, but it only lasted two months and wasn’t followed by a recession.
In March 2000, meanwhile, the bear market brought about by the “dotcom bubble” bursting sent the stock market down 49% – and was followed by recession in 2001. While you were busy playing Pokémon, that bear market dragged on for 31 months.
A bear market ends when stocks begin to reverse their declines by rising at least 20% out of the trough – (re)entering a bull market.