Stock Trader Stood in Front of a Large Display of Stock Prices
Bear markets – the name given to periods of stock market decline – can be scary for investors, but there can be opportunities amid the possible losses.
Following the introduction of Donald Trump’s global tariffs, Wall Street has today entered a “bear market” – but history is littered with them, and it’s important to know the best way to invest when they occur.
Here, Telegraph Money explains what a bear market is, and what it means for your investments. This guide will cover:
It’s a term usually invoked when there is a fall of around 20pc or more over a period of at least two months.
Susannah Streeter, head of money and markets at stockbroker Hargreaves Lansdown, said: “Bear markets can begin with a stock market dip, and a mini-correction or period of volatility before a decline beds in.”
Bear markets usually follow a large or unexpected shock to the global economy, or the financial system – and sometimes both.
Richard Hunter, head of markets at stockbroker Interactive Investor, said: “Uncertainty – the nemesis of investment – then pervades as sellers rush for the same exit. This is followed by investors scrambling to assess the full impact of the event.”
This can lead to a downward spiral which, historically, can take some years to reverse.
What causes a bear market?
There can be a number of different events which can spark a bear market. These could include:
Geopolitical shocks – these can include terrorist attacks, high profile assassinations, unexpected political changes
Wars
Public health crises – such as the Covid-19 pandemic
Market bubbles
Major economic shifts, including Donald Trump’s global tariffs.
Phases
The start of a bear market is really the bull market that precedes it. Russ Mould, investment director at stockbroker AJ Bell, said: “More pertinently, it’s the final ‘blow-off’ boom that takes valuations to levels that cannot be sustained, and expectations for profit growth and cash flows that cannot ultimately be met.”
During the boom, insiders (such as management, founders, entrepreneurs) will start to sell their stock to take advantage of lofty prices. Mr Mould said: “Eventually sellers will start to overwhelm would-be buyers, who keep the faith and continue to buy on the dips, because that is what has worked for so long during the bull market.”
In what is becoming a bear market, each rally fades. The high fails to reach previous highs, and the lows before the next rally get lower. Mr Mould said: “Faith begins to ebb. Would-be buyers become forced sellers if they have borrowed to fund their investment, and rather than buying on the dip, investors start selling into the rallies.”
Confidence wobbles further and pessimism spreads. At this point, the dash for the exit is well and truly on. Spreading pessimism about market performance can act as a “negative feedback loop”, exacerbating the stock market decline as a sell-off gains momentum.
Only then does sentiment become sufficiently washed out for pessimism to prevail and the cycle to start again.
Examples
Global financial crisis
The global financial crisis of 2007-09 was perhaps the most acute bear market of recent times.
Mr Hunter said: “A recession in the US was of little consequence in view of what followed, with the subprime mortgage market descending into chaos. The reverberations crossed the entire global financial system.” This resulted in widespread danger of insolvency for many important financial institutions.
Mr Hunter added: “Unprecedented interventions by global central banks helped to steady the ship, including large swathes of ‘quantitative easing’.”
Quantitative easing (QE) injected liquidity into the system and forced interest rates down to historically low levels.
This was followed by a number of regulatory moves which sought to strengthen banks’ balance sheets in an effort to avoid a repeat.
Covid pandemic
Markets suffered following the global pandemic in 2020.
Mr Hunter said: “Closing down the world was never going to be positive for shares. Enforced lockdowns left premises empty, removing revenues for many sectors, ranging from hospitality to events. Aeroplanes were, for the most part, grounded. While there were exceptions – such as online retailers – the ravages of the pandemic, although largely resolved, are still being felt in certain areas.”
US inflation rises
During 2022, for the first 10 months, US stocks were mired in a bear market as inflation took off and interest rates were raised in quick succession.
Ms Streeter said: “This ended up being a relatively short and mild bear market, as it segued into a bull run, with the tech giants dubbed the ‘magnificent seven’ leading the charge.”
Historic bear market
The deepest darkest bear market is considered to be the slump which followed the Wall Street crash of 1929, which caused an ensuing period known as the Great Depression.
This global economic downturn lasted until 1941, causing widespread and prolonged unemployment and poverty.
Difference between bear market and bull market
Bear market
A bear market is a crisis of investor confidence – it describes a prolonged stock market decline.
Bear markets are historically shorter than bull markets, but there can be a long lull before recovery sets in.
The average bear market for the FTSE All-Share has lasted for just over a year, according to Hargreaves Lansdown. For the S&P 500 it’s more like nine and a half months.
Bull market
A bull market is a stock market awash with investor optimism, there may be volatility, but the trend will see prices pushed up, with indices reaching fresh highs.
The average length of a bull market for the US stock market is around three years, whereas for the UK stock market, it’s around six years.
Bear market vs correction
A bear market is typically declared when a decline of 20pc is seen in any given index from its most recent high.
By contrast, a market decline of greater than 10pc (but less than 20pc) is known as a “correction”.
Bear markets can last longer and cause more significant losses
Corrections happen more often, but tend to be shorter in duration.
How to invest during a bear market
As mentioned above, one of the characteristics of a bear market is widespread selling as investors try to cash out before the market takes a dive. But for those who want to make the most of the situation, there are choices to make.
As a rule, market falls tend to be accompanied by markdowns of shares, irrespective of the fact that there will be sectors which have little attachment to the underlying cause of the downturn.
You as an investor might question whether the “quality” company you hold has become a poor investment overnight – or whether it has simply been caught in the crossfire.
Some investors position themselves “defensively” during such periods, sticking to stocks in companies that are the most protected from dips. This may suit more cautious investors – after all, the likes of utilities and supermarkets will still be needed.
More adventurous investors could look to top up their existing holdings, given the lower valuations and higher prospects for share price appreciation over a period of time.
How to manage existing investments
Given the historic pattern of recovery following a bear market, it’s always best not to panic and withdraw money rapidly. You need to be able to look through the “noise” of events, both large and small, with psychological detachment.
That said, a steep trend downward should prompt a re-evaluation of a portfolio to ensure it’s well diversified.
Time in the market and diversification have consistently been the foundations of successful investing strategies. For investors owning quality companies over the long term, a bear market ride is part of the longer journey.
Remember, investing should always be for the long term – for a period of five years or more. By switching to this mindset, it means that the price of an investment today or tomorrow doesn’t matter so much and, hopefully, any dips will even out over time.
The strategy of drip-feeding investments by gradually allocating funds can also help mitigate risks, and can pay off in a bear market. It means investors will be able to take advantage of lower prices and benefit during a recovery.
Bear market FAQs
Is a bear market the same as a recession?
While the two terms often go hand-in-hand, they are not the same.
Broadly, a recession relates to a slowdown in economic output. It is usually defined as at least two consecutive quarters of decline in GDP (gross domestic product).
A bear market, on the other hand, relates to the market reaction to a shocking event – the negative investor sentiment.
The key thing to understand is that the stock market is not the economy. However, confusingly, it’s worth noting that an unexpected recession could be the cause of a bear market.
Should you buy in a bear market?
If you’re worried about falling returns, you may be more inclined to sell rather than buy stocks during a bear market.
Panic-selling is not a great idea – but if you are thinking about buying instead, you need to tread very carefully.
Ms Streeter said: “Rushing to buy a declining asset is like trying to catch a falling knife, and it can end in tears. So, in a bear market, it’s important not to abandon a long-term lens. It’s a reminder to take a step back, assess the situation and make sure you haven’t put all your eggs in one basket. You need to check that your risk is spread across different asset classes and parts of the world.”
This way you should always have something working for you, even if markets continue to fall.
Ms Streeter added: “Assets such as gold and bonds, more defensive stocks like utilities, health care firms, companies selling consumer staples and those with reliable or high-yielding dividends tend to be more resilient during bear markets.’’
Is a bear market better than a bull market?
Put simply, a bear market is no fun at all.
That said, a well-balanced, diversified portfolio across a range of asset classes, geographies, industry sectors and securities could be the difference you need to get through it relatively unscathed.
Mr Mould said: “This can help you get from one side to the other, without having to sell at an inopportune time, and then wait for the next upward leg.”
