What is a bear market?
A bear market describes a widespread and sustained decline in the prices of stocks or other assets over a given period of time. Market prices for any asset — gold, bonds, homes, baseball cards — fluctuate constantly. When they fall steeply over time, the condition is described as a bear market; sustained price gains over time is called a bull market. Generally speaking, a price decline of 20 percent or more from a peak that lasts for two months or more is the threshold for a bear market.
All markets are characterized by a cyclical rise and fall of prices over time, influenced by myriad factors: interest rates, economic cycles, supply and demand, confidence and pessimism. Bear markets are born as confidence wanes following a period of favorable prices and economic optimism, or after a speculative bubble. As market participants become more pessimistic about the economy and the market, they sell off investments. Selling begets more selling in a self-sustaining reaction, as more and more investors sell to avoid losses from declining prices.
There are various potential outcomes from market declines. Sustained, rapid selling can cause a market crash, as panic takes over and participants flee markets in a disorderly way. Alternatively, the declines can remain orderly but still irresistible, leading to stagnation and lower trading activity. In either case, very low prices spur a buyer’s market that will draw in new investors looking for underpriced assets, in a process that rebuilds confidence and can eventually drive a new bull market.
A market correction is a similar but less dramatic decline in prices. With a market correction, investors and participants may feel that prices have risen to high, too quickly, and that a modest decline in prices is a positive, reasonable reorientation of a market. While a bear market is considered to be a 20 percent decline in prices from a peak, a market correction is widely considered to be a 10 percent decline from a peak.
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Bear market example
The most notable bear market in history accompanied the Great Depression of the 1930s. The Dow Jones Industrial Average peaked at 381 points on September 3, 1929 after a nine-year bull market, and only two months later experienced a devastating stock market crash on Black Tuesday, October 29, 1929. Between early September of 1929 and the bottom of the market on July 8, 1932, the DJIA lost approximately 89 percent of its value. The DJIA peak seen in September 1929 was not reached again until 1954.