Bear Markets Explained: 4 Characteristics of a Bear Market

A bear market is a sustained downturn in a financial market such as the stock market. On Wall Street, home to markets like the New York Stock Exchange and the NASDAQ, bear market territory is traditionally marked by a 20 percent downturn in stock prices over a two-month period. This is not to be confused with a market correction, which is a short-term price decline rather than a sustained downward trend.

The opposite of a bear market is a bull market, which involves steady growth in market values. Long-term bull markets, sometimes called secular bull markets, can result in all-time high stock prices. High stock prices can cause an overheated market, which can lead to a sell-off of stocks, prompting a bear market.

There are two principle types of bear markets: cyclical and secular. A cyclical bear market is a short-term bear market that periodically occurs due to normal market volatility and lasts for months. A secular bear market covers a multi-year period (typically 10 to 20 years) wherein market prices underperform their average gains.

During a secular bear market, a bear market rally may occur that makes it seem as though prices are rebounding when, in fact, they are serving as a correction to a still-declining market. An infamous bear market rally occurred shortly after the stock market crash of 1929. The Dow Jones Industrial Average (DJIA) briefly rallied, causing investors to believe a new bull market had begun. In fact, the rally was just a correction, and stocks sank again toward a new market bottom; this helped set off the Great Depression.

A few recurring characteristics define bear markets.

1. 1. Diminished investor confidence: Financial markets tend to produce self-fulfilling results. When investors lack confidence in a market, they pull their funds, which causes the market to further depress.
2. 2. Fluctuating interest rates: Interest rates set by central banks can stimulate an economy and regulate inflation. When interest rates rise too rapidly, bond markets thrive, but stock markets may enter bear territory.
3. 3. A rise in short selling: In bear markets, professional investors may resort to short selling, puts, and inverse exchange-traded funds (ETFs). All of these financial maneuvers involve a bet that the stock market will continue to go down. Short selling is risky for individual investors, and it can further tank declining markets.
4. 4. A decline in IPOs: An initial public offering (IPO) happens when a private company decides to become publicly traded on a stock exchange. In a bear market, going public can lead to diminished company value. Businesses may opt to remain private until a bear market transitions back into a bull market.

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