Understanding a Bear Market
A bear market refers to a market that has experienced a decline of at least 20% from its previous high point over the span of a few months.
This decline is often triggered by an economic downturn or a significant event with substantial economic consequences, such as the emergence of a new Coronavirus outbreak.
The Origins of the Term “Bear Market”
The etymology of the term “bear market” has a few speculative explanations.
Some believe it stems from an old saying cautioning against selling a bear’s skin before catching the bear itself.
Others suggest that the term is inspired by how bears attack their prey, swiping their paws downward.
Understanding Economic Contractions
Generally, a bear market corrects itself, and the economy recovers relatively quickly.
However, if stock values continue to decline, it may lead to a recession.
A recession is characterized by an extended period of negative economic growth and a halt in overall expansion, usually two quarters or more.
Bear Market vs Market Correction vs Pullback
- Pullback refers to a temporary price decline ranging from 3% to 10%. It is typically short-lived, lasting only a few days or weeks. During a pullback, there is a minor deviation from a recent high, but the underlying trend remains unchanged.
- Market correction occurs when prices drop by 10% to 20% and linger within that range for two to four months. These periods are highly volatile and often cause investor concerns about the possibility of a bear market, leading some to sell their investments. Real-time news can amplify these fears as investors may be influenced by crowd psychology and make preemptive judgments.
- Bear market emerges when prices fall by 20% or more and can persist for months or even years. Investor confidence deteriorates, leading many to exit the market. Trading activity decreases as more investors sell their stocks to avoid further losses.
To learn more, read our in-depth article about bear vs. bull markets.