What Is a Bear Market?
In plain English
A bear market is defined as a broad market index declining 20% or more from its most recent peak, sustained over at least two months. Bear markets are typically associated with economic slowdowns, rising unemployment, reduced corporate earnings, and negative investor sentiment. While painful in the short term, bear markets are historically followed by bull market recoveries, making them key buying opportunities for long-term investors.
How Long Do Bear Markets Typically Last?
Since World War II, the average U.S. bear market has lasted about 11 months and produced an average peak-to-trough decline of roughly 35%. The longest bear market was the dot-com crash from 2000 to 2002, lasting about 2.5 years. By comparison, bull markets have historically been both longer in duration and larger in magnitude, which is why staying invested through bear markets has generally rewarded patient investors.
What Should You Do During a Bear Market?
The most important action during a bear market is to avoid panic selling, which locks in losses and causes you to miss the recovery. Investors who continued dollar-cost averaging into index funds during bear markets dramatically improved their long-term returns. Review your asset allocation to ensure it matches your risk tolerance. If falling prices cause extreme anxiety, you may be taking more risk than appropriate for your situation.
How Is a Bear Market Different From a Correction?
A stock market correction is a decline of 10% to 19.9% from a recent peak. Corrections are common, occurring roughly once per year on average, and are generally resolved within a few months. A bear market requires a 20% or greater decline. While all bear markets begin as corrections, not all corrections become bear markets. Corrections are considered normal and healthy — bear markets are more severe and signal deeper economic stress.
Frequently asked questions
Can you make money during a bear market?
Yes. Short sellers profit when stock prices fall. Investors can also buy assets at reduced prices that appreciate during the subsequent recovery. Defensive sectors like utilities, consumer staples, and healthcare typically outperform during bear markets. Bond prices often rise when stocks fall, benefiting investors with diversified portfolios.
Does a bear market mean a recession is coming?
Not necessarily. Bear markets and recessions often coincide, but not always. Stock markets can fall in anticipation of an economic slowdown that never materializes, or can hold up during mild recessions. Conversely, bear markets sometimes end before economic data confirms a recovery. Markets are forward-looking and often move ahead of economic reality.
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Related terms
Bull Market
A bull market is a sustained period of rising stock prices, typically defined as a 20% gain from recent lows. Bull markets are characterized by economic growth, investor optimism, and rising corporate earnings.
Volatility
Volatility measures how much and how quickly the price of an investment rises and falls over time. High volatility means larger price swings; low volatility means more stable, predictable price movements.
Dollar-Cost Averaging
Dollar-cost averaging means investing a fixed dollar amount at regular intervals regardless of market conditions. This strategy reduces the impact of volatility on your overall purchase price.
Diversification
Diversification means spreading investments across different assets, sectors, and geographies to reduce risk. It reflects the principle of not putting all your eggs in one basket.
Portfolio Rebalancing
Portfolio rebalancing is the process of realigning the weights of your investments back to your target asset allocation. It is a disciplined way to manage risk and enforce buying low and selling high.