Have you ever seen the bronze sculpture of the Charging Bull in Manhattan? Sometimes referred to as the Bull of Wall Street or the Bowling Green Bull, it represents the hopes for the stock market. Why a bull? In battle, a bull uses its horn to thrust upward, and in this way represents the best of what the stock market can do where prices rise and everybody makes money. A bear, on the other hands, uses its claws to swing down.
Despite being a normal part of the market cycle, the bear is sadly neglected and not represented. This is likely because a a bear market is a period of decline.
As of the close of the markets on Friday, May 13th, Nasdaq was down more than 26% compared with November 2021 peak.
What is a bear market?
Specifically, a bear market is when the stock market falls by 20% or more from its peak. It’s called a bear market because it’s said to be like when a bear attacks its prey – it’s sudden, and can cause a lot of damage.
The history behind the term
While there are a few different origin stories, the term “bear market” has actually been around for centuries. It’s thought to have originated in London in the early 1600s, when bear skins were being bought and sold. At that time, there was a lot of speculation in the bearskin market, and prices would go up and down depending on supply and demand.
When the market crashed, it was said that the bears were in control, and so the phrase bear market came to be used to describe a market where prices are falling.
What causes bear markets?
There is no single cause of bear markets, but they are often triggered by economic recession, high interest rates, or political uncertainty.
What are the characteristics of bear markets?
For the stock market, bear markets are characterized by falling stock prices and investor pessimism. During bear markets, it is common for investors to sell stocks and move into cash or other safe-haven investments.
The duration of bear markets varies, but they can last for months or even years. One of the most recent bear markets in the US stock market lasted from October 2007 to March 2009, a span of nearly 17 months.
What happens during bear markets?
During bear markets, stock prices tend to fall across the board. This can lead to widespread losses for investors, as well as reduced economic activity. Bear markets can also cause a decline in consumer and business confidence, which can further contribute to economic recession.
What should you do during a bear market?
If you are invested in the stock market, it is important to remember that bear markets are a normal part of the investing cycle. While bear markets can be painful in the short-term, they provide opportunities to buy stocks at lower prices.
How to avoid losses in a bear market
There are several things you can do to protect your portfolio from bear market losses:
Have a long-term investment horizon: bear markets are usually temporary, so if you can afford to wait it out, you may be able to ride the market back up.
Use stop-loss orders: these orders can help you limit your losses if the market falls.
Invest in bear market funds: these are mutual funds that are designed to perform well during bear markets.
How to cope with investing during a bear market
If you’re already invested in the stock market, there are several things you can do to help weather the storm:
Stay calm: it can be tempting to sell everything when the market is falling. In fact, it’s pretty normal if you freak out with market fluctuations, but try to stay calm and stick to your investing plan. )
Review your portfolio: make sure that your portfolio is still diversified and that you’re comfortable with the risk level by asking yourself the following questions:
And most importantly, are you confident in your investment plan?
Keep investing: if you have cash available, you may want to consider investing it in a bear market. While there is risk involved, there is also the potential for higher returns.
Bear markets can be scary, but if you understand what they are and how to deal with them, you can help minimize your losses and make it through to the other side.
If you are not invested in the stock market, bear markets can still have an impact on your finances. For example, bear markets can lead to a decline in business activity and job losses. If you are concerned about how a bear market may impact your finances, it is important to speak with a financial advisor or money coach.