Bear Market: Meaning, Phases, Signs & Causes
The stock market generally has two situations – a bull market and a bear market. Investors should stay aware of both to identify them and take decisions that suit their investment objective and risk appetite. This article covers the details of a bear market, its signs and what individuals can do when faced with one. Read on!
What Is a Bear Market?
In the stock market, a bear market is a situation or time period when stock prices show a sharp downturn trend with no bullish sentiments on the horizon. Generally, the values of stocks need to fall at least by 20% or more for the market to be called bearish.
During this time, there is a fall in speculative demand among investors, thereby slowing down the aggregate cash flow in an economy’s capital sector.
The opposite of a bear market is a bull market. During a bullish market, prices of securities witness steady rise, and the overall sentiment of the market remains favourable for investors. In contrast, a bearish market witnesses a depreciating value of securities.
What Are the Signs of a Bear Market?
You should look out for the following signs to identify a bear market:
- Falling Benchmark Indices
One of the potent signs of a bear market is falling stock market indices. Under such circumstances, investors generally hold on to their funds or purchase riskless investments rather than investing them in the stock market.
A recession is another sign that the market is entering bear territory. Recession becomes evident due to many micro/macro economic factors for example, during such situations, there is a low demand for goods and services while the supply for them is high. This causes their prices to fall sharply in most sectors of the economy, leading to a decline in the country’s GDP.
In such a scenario, investors generally have a negative mindset towards allocating their funds to the stock market. They often refrain from investing as they anticipate a further downward spiral of prices, thereby accelerating the rate at which stock prices fall.
What Causes the Stock Market to Turn Bearish?
Here are some reasons that cause the market to enter the bear territory:
- Global Recession
If individuals all over the world have a negative outlook towards investing, it can give rise to a global recession. This will compel significant stock markets around the globe to become bearish. Moreover, businesses worldwide will continue to incur losses due to the decline in demand for their goods and services, and as a result, their respective stock prices will also decline.
The effect of a global recession appears more significantly on small and mid-cap companies as their stock prices tend to fluctuate rapidly.
- Unforeseen Market Fluctuations
A country’s stock market can suffer volatility due to sudden socioeconomic changes. For example, if a political decision severely impacts the performance of major businesses functioning in an economy, the amount of wealth people invest in these stocks will also take a hit giving rise to fluctuations in the share market.
- Global Investor Mindset
In today’s world, all nations in the world are interdependent. Thus, if there is a massive fluctuation in the economy of a big nation, its effects would be felt in the domestic economy as well.
For example, when the Russia-Ukraine war broke out, the Sensex fell over 1700 points, causing havoc in the Indian stock market. This occurred due to the fluctuation in the import and export revenues resulting from this event.
What Are the Phases of a Bear Market?
A bearish market generally goes through four major phases. They are as follows:
- High Investor Sentiment
Generally, just before the beginning of a bearish market, there is a bull market in which investor sentiments are high. Individuals allocate more funds to the stock market as they believe that the prices will rise. Thus, the market experiences a bull run causing stock prices to soar.
- Low Investor Sentiment
After the bull run, due to certain events or economic factors, investor sentiments start to decline, and so do trading activity and potential profits. Under such circumstances, investors fear a rapid fall in share prices and start selling their investments.
From this point, the bear market starts, and some experts even call it Capitulation.
- Speculation Period
In this phase, speculators enter the market in search of profit-making opportunities due to the heightened price movement. As a result, trading volume increases and stock prices start to rise.
During this phase, investors still experience a fall in stock prices; however, its intensity remains low. The situation that caused the sell-off gets rectified, and investors start having a positive outlook towards the market. Hereafter, the stock prices start to rise steadily, leading to the next bull market.
During a bear market, it is ideal to keep investing consistently in the share market to purchase quality stocks at more affordable prices. You should also consider investing in high-dividend stocks with good fundamentals and a good track record of dividend growth over a long period. This will help boost the returns on your investments even when the stock prices are falling.
Frequently Asked Questions
What is the average length of a bear market cycle in India?
The actual length of a bear market cycle depends on various macro and micro-economic conditions. Generally, it lasts for an average of 289 days.
What should I avoid doing in a bear market?
During a bear market, you should not cash in to avoid volatility, make risky investments, or purchase shares of companies you do not know much about.
Can I profit in a bear market?
Yes, you can profit in a bear market if you know the right time to buy and sell. A good strategy is to buy shares of companies with solid fundamentals and hold them for the long term. You can gain good profits if you average such stocks’ price highs and lows.
What are the best stocks to purchase during a bear market?
The best stocks to buy during a bear market are those of utility companies and companies based around consumer staples, lifestyle essentials and healthcare.