What Is a Bear Market and How to Invest in One?

A bear market is a common term in investment circles. But, what does it mean and how is it different to a bull market?

What is a bear market?

The term ‘bear market’ apparently originates from the way that bears swipe their paws down while attacking in the wild. ‘Bear’ markets are the opposite of bull markets, and while there’s no hard and fast rule, the generally-accepted definition is that they occur when the markets fall by more than 20%.

How can you tell if we are in a bear market?

In bear markets, the prices of securities are falling, and widespread pessimism among investors caused by the falling prices leads to self-sustaining negative sentiment. Investors continue to anticipate losses in a bear market, and continue to sell their shares. Many people see bear markets as an opportunity to make money due to the low share prices, but this requires finding a suitable entry point. Locating an entry point in bear markets can be hard as timing the bottom can be difficult to do.

What is a bull market?

To really understand what a bear market is you’ll need to be introduced to a bull market too. Apparently, the term ‘bull market’ originates from the way that bulls attack their victims by driving their horns up into the air. And there’s also the fact that bulls, on the attack, charge straight ahead at pace.

A market is referred to as a ‘bull’ market when the share market is showing confidence. It is essentially a market in which share prices continue to rise, encouraging buying. After a sustained period of increasing share prices, investors gain faith that the uptrend will continue in the long-term. In a typical bull-market, the country’s economy is strong and unemployment is low.

A market may be called a bull market after a number of ‘bullish’ days in succession, but the technical criteria for a bull market is a rise in the value of the market by 20%.

How to invest in a bear market?

When share markets decline, often investors get a little nervous. It is easy to forget that bear markets typically do end and the share market tends to bounce back. If you panic and sell, you may lock in losses and miss out on the potential for stocks to recover.

Some investors will actually buy more shares during this time, when prices are cheaper, this is known as buying the dip. Investors could consider buying less risky stocks like consumer staples. No matter what the economy is doing, consumer staples are always needed, think food, drugs, beverages and basic household products.

Away from stocks, a bear market may be a good time to consider other assets, like bonds and cash. Often when stocks go down, interest rates for bonds and cash go up.

Although, with any investment you make be sure to understand the risks involved, do your research and choose wisely before buying. Remember, that past performance is not an indicator of future performance, and if ever in doubt seek the help of a financial adviser.

What happens when we move from a bull market to a bear market?

Sometimes, a move from a bull to a bear market (and vice versa) is rather gradual, taking place under the radar with little or no attention. Other times, it can be far more dramatic and sudden, an example of this is a stock market crash.

Related article: Understanding market sentiment and how it affects asset prices

What are some of the biggest crashes in Australian stock market history?

1929 Share market crash

More commonly known as the great depression, 1929 through to the mid-1930s was a time of extreme economic hardship for the people of Australia. Unemployment was already at 10% prior to the collapse of Wall Street, and the crash caused a severe depression for the whole industrialised world.

Unemployment soon doubled to 21% in 1930, and soon increased to an incredible 32% in 1932. While the cause of the great depression in America is still debated by economists, it was more straight-forward for Australia. Australia’s monetary policy relied heavily on borrowing from other countries for investment.

1987 Share market crash

Also known as Black Monday (Black Tuesday in Australia), the 19^th of October 1987 saw stock markets around the world crash unexpectedly, shedding huge amounts of money in a short space of time. Markets in Australia fell by over 40%, and a full recovery took more than five years.

Asian Financial Crisis

Also called the Asian Contagion, the Asian Financial Crisis was a series of currency devaluations that spread throughout Asian markets in 1997. These currency declines caused reduced import revenues, government upheavals and stock market declines.

The AFC had no long-term impact on Australian shares. There was an almost 1,500 point drop in a few days following the crisis, but share prices returned to normal within 76 days.

9/11 Terrorist attacks

After the horrific terrorist attacks in 2001 on the World Trade Centre, The New York Stock Exchange did not open for trading. The NYSE anticipated complete market chaos and panic selling following the attacks, and remained closed until the 17^th of September, the longest shutdown since the Great Depression.

Once it re-opened, the US market fell by 7.1%. The airline and insurance sectors suffered more than others. However, the U.S market regained its pre-9/11 prices after slightly more than a month following the attacks. The 9/11 attacks did not represent any long-term losses for Australia.

2008 Global Financial Crisis

Housing markets suffered, large financial institutions either collapsed or were bailed out by national governments, and stock markets dropped worldwide.

In 2008, the S&P/ASX 200 reached a low point of 3,120 points, but Australia performed well during the crisis compared to other countries. The Australian economy recorded better growth outcomes than most other developed countries and our banks have remained profitable. It took more than ten years for the ASX to reach pre-GFC values.

Covid-19 Crash

The Covid-19 crash is considered to be one of the worst financial crises since the great depression. The stock crash was the quickest global fall in financial history. However, this bear market was only short lived with the global market re-entering a bull market months later.

Originally published by William Jolly. 

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