Takeaways
- Bear markets occur when stock market prices fall, and investor skepticism is high.
- Bear markets are marked by decreases of at least 20% from recent highs.
- Bear markets are defined by falls in the value of stock over at least two months.
- Bear markets can be long or short but cycle length is hard to predict.
- With the right investing strategy, investors can make money in bear or bull markets.
Predicting where the stock market is heading has long been the holy grail for both new investors and seasoned professionals. Markets continuously oscillate based on industry, geographic, international, and political variables. Stock indexes, like the S&P 500 or Dow Jones, grow during a bull market and contract during a bear market.
The good news is that you can make money in both markets, and long-term investors remain virtually agnostic to which market the economy is experiencing.
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What Is a Bear Market?
According to the U.S. Securities and Exchange Commission (SEC), a bear market is when investor sentiment is pessimistic, and stock prices fall. The definition gets more specific because a bear market is technically marked by a 20% fall in a broad market index over at least two months.[1]
Bear markets are notorious for causing panic selling. Investors start to see a decline in their portfolios and feel the need to stymie their losses. As a result, they sell investments and convert them into cash. Other investors notice this trend, and the pattern continues. Bear markets, however, tend to last shorter than bull markets.
Read: What Is Investment Diversification?
Beginner investors should understand that you can make money in a bear market. Specific investing strategies, like shorting stocks and indexes or shifting your portfolio to take advantage of recession-proof investments can help you make money. Alternatively, some fixed-income investment strategies can start to make perfect sense during a bear market.
Read More: What Is Passive Investing?
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Bear Market Cycles
Bull markets, like bear markets, come and go. They are a natural part of market cycles. The average bear market lasts around 289 days, and stocks lose about 35% of their value. The average bull market lasts 965 days, and stocks tend to increase by 111%.
Learn More: What Is Dollar-Cost Averaging?
Bear markets can be hard to spot. Stock markets increase and decrease daily but must decrease by 20% from a market peak to technically enter bear territory. For example, from 1927 to 2020, the S&P 500 declined 22 times between 15% to 30%.[2] Only some of these declines were bear markets, and a portion of those were recessionary bear markets.
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2 Main Types of Bear Markets
Not all bear markets are equal. Here are two types of bear markets that economists and investors look for:
- Recessionary: These bear markets lead to broader economic recessions and slower economic growth. Recessionary bear markets generally last longer and highlight broader economic concerns. Recessionary bear markets have an average decline in stock prices of 43.2%.
- Non-recessionary: While non-recessionary bear markets still have stock prices decline by at least 20% for over two months, they can be easier to handle. This is because they don't last as long as recessionary bear markets. These bear markets, on average, decline stock prices by 27.4%. Importantly, non-recessionary bear markets do not lead to a broader recession and can be the starting point for the next bull market.
There can be many factors that create the conditions for a bear market. Economic factors - rising inflation, increasing interest rates, and slowing job growth - can lead to a bear market. Military conflict can also curb economic growth and pivot to a bear market.
Should You Invest in a Bear Market?
The short answer is – yes. Trying to time the ups and downs of the stock market is a fool's errand. Some investors get lucky now and then. However, financial professionals argue that you should focus less on when to invest and concentrate more on investing consistently.
Of course, where you invest is a mixture of your specific investment time horizon, risk appetite, and desired diversification. The milieu of these variables helps determine your investment strategy and should marry with your long-term financial goals.
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Where to Invest in a Bear Market
Keeping abreast of the market is vital to any successful investing strategy. If you can’t resist the temptation to shift your money out of regular stocks and into other investments during an economic downturn, here are several investment options to keep your money growing.
- Bonds: Many kinds of bonds produce high yields, which can help increase your overall portfolio. For instance, corporate bonds and municipal bonds offer alternative investment opportunities.
- High-Yielding Savings Account: During times of high-interest rates, high-yielding savings accounts can be excellent places to store your excess cash. Investors who don’t want to deal with the stock market can still earn interest income and grow their portfolios. Here are the Smart Money picks for the best high-yield savings accounts.
- Certifications of Deposit (CDs): CDs can have short-term maturities of only a couple of months or long-term maturities of several years. CDs offer investors flexibility on investment time horizons and generate high annual percentage yields (APYs). (Read more about jumbo CDs).
- High Dividend-Yielding Stocks: Stocks that pay dividends are in a different class from those that do not. Companies that pay dividends have stronger financials and tend to be in more recession-proof industries. Dividends offer a way for investors to make passive income. Need ideas? Check out the dividend aristocrats.
Smart Summary
Watching your portfolio crater by more than 20% can be unnerving. Good financial planning can get you comfortable investing in bear and bull markets. Knowing how much you want to allocate to stock investing and being comfortable with those risks is a critical step in that process. Increasing your income can also help you get comfortable investing in any market, particularly when you remain cash-flush with an emergency and slush fund. Long-term-oriented investors understand historically, investing leads to an increase in total net worth.
(1) U.S. Securities and Exchange Commission. Bear Market. Last Accessed January 19, 2025.
(2) The Bare Necessities: A taxonomy of S&P 500 bear markets. Last Accessed January 19, 2025.
