Let’s look at the definition of a bear market, what causes a bear market, the difference between a bull market and a bear market rally, and other important concepts for investors to understand.
What is a Bear Market?
Typically, a bear market is defined as a 20% drop from recent highs. The most common application of the term is to refer to the performance of the S& P 500, which is widely regarded as a leading indicator of the overall stock market.
The term bear market, on the other hand, can refer to any stock index or individual stock that has fallen 20% or more from recent highs. For example, we could say that the Nasdaq Composite entered a bear market during the dot-com bubble burst in 1999 and 2000. For example, suppose a company reports poor earnings and its stock drops by 30%. We could say that the stock has entered bear market territory.
Although the terms bear market and stock market correction are frequently used interchangeably, they refer to two distinct magnitudes of negative performance. A stock market correction occurs when stocks fall by 10% or more from recent highs, and a correction can be upgraded to a bear market once the 20% threshold is reached.
Causes of a Bear Market
A bear market is typically caused by investor fear or uncertainty, but there are numerous other possibilities. While the most recent 2020 bear market was caused by the global COVID-19 pandemic, other historical causes have included widespread investor speculation, irresponsible lending, oil price movements, over-leveraged investing, and more.
Bear vs. Bull
A bull market is essentially the opposite of a bear market. Bull markets occur when there is a sustained rise in stock prices, and they are typically accompanied by elevated consumer confidence, low unemployment, and strong economic growth.
Generally speaking, a bull market is defined as a 20% rise from the lows reached in a bear market, but the definition isn’t as strict as that of a bear market. Investors typically mark the start of a bull market at the market bottom of a bear market. For example, the S&P 500 reached the lows of the financial crisis in March 2009, so that is considered the start of the bull market that lasted until early 2020.
To be precise, two things generally need to occur before a new bull market can be declared: a rise of 20% from recent bear market lows and new all-time highs in the benchmark indices.