What is a Bear Market?

Certain terms have a way of spooking investors — and bear market is one of them. It signals that stock prices have been on a downward trend for a sustained period. That can set off alarm bells for investors and nudge them to sell their holdings, which often causes the stock market to drop even more. 

But a bear market isn’t all bad news. Knowing how to invest during market slumps can help you weather the storm and maybe even come out the other side stronger than before.

What is a bear market? 

A bear market occurs when market indexes fall by at least 20% over a two-month period or more. In other words, a lot of investors sell their holdings at the same time. A market index tracks the performance of a specific group of investments. The most influential stock market indexes include the S&P 500, the Dow Jones Industrial Average and the Nasdaq composite (not to be confused with the Nasdaq exchange).

Market dips can be unsettling for investors — no one likes to see their investment account balances tumble. U.S. stocks have experienced 26 bear markets over the last 150 years, but the market has always bounced back. Market ups and downs are just part of investing. Those who are in it for the long haul can expect some turbulence along the way. 

It’s important to note that a bear market isn’t the same thing as a market correction, which happens when a stock market index drops more than 10% from a recent high. A bear market, on the other hand, reflects a steeper, longer-lasting decline where investor confidence is also down.

Bear vs. bull market

Bull markets are on the other end of the spectrum. A market is in bull territory if its major indexes increase by 20% or more over a period of at least two months. There have been 14 bull markets since June 1932. 

During a bull market, the economy tends to exhibit falling unemployment rates and an expanding gross domestic product (GDP). GDP is the total value of the final goods and services a country produces. Interest rates are usually on the lower side as companies focus on growth. 

Bear markets typically occur during more uncertain times. Global and domestic politics, inflation and rising interest rates can all shake investor confidence and push markets downward.

Bear market vs. recession

The term “bear market” refers to the state of the stock market, while a recession refers to the overall economy. Economists typically define a recession as at least two consecutive quarters of a negative GDP growth rate. Inflation, asset bubbles, low consumer confidence and manufacturing slowdowns can all provoke an economic downturn. Recessions usually happen alongside:

• High unemployment

• Declining wages

• Lower housing prices

• Stock market declines

Recessions tend to follow bear markets, but that isn’t a sure thing. There have been seven bear markets since 1973. Of these, five were accompanied by recessions.

How long do bear markets last?

Bear markets have historically varied in length. Since 1929, the shortest one lasted just over one month at the start of the COVID-19 pandemic. The longest bear market, which was triggered by the dot-com bubble burst in 2000, lasted about 30 months. There have been 22 bear markets since 1929.

Average bear market length

Every bear market is different, and current economic conditions can influence investors in different ways. With that said, one report found that since 1929, the average bear market lasted close to 11 months. The average S&P 500 index return was -35.5% during those periods.

Bear market history

Again, bear and bull markets are a normal part of investing. However, some past bear markets have coincided with major economic events. Some of those include: 

• The market crash of 1929

• The Black Monday market crash of 1987

• The dot-com bubble burst of 2000

• The global financial crisis of 2007

• The beginning of the COVID-19 pandemic in 2020

Investing in a bear market

A bear market may feel daunting, but falling stock prices can make it a good time for new investors to enter the market. If you’re in it for the long run, the hope is that you’ll have time to ride things out before the market rebounds. In the meantime, short-term losses can be tough to stomach, and keeping your emotions at bay isn’t always easy — but cutting your losses and selling off your holdings (or avoiding the market altogether) may come back to bite you. Here are a few different ways to invest when market indexes drop during a bear market.

Stay invested

You can’t take advantage of future gains if you aren’t invested. That doesn’t mean blindly following an investment plan that isn’t serving you. The right strategy for you has everything to do with your age, risk tolerance and financial goals. During a bear market, your financial advisor may recommend tweaking your approach. This may include rebalancing your portfolio and modifying your asset allocation. If you’re close to retirement or already there, you might choose to lean on safer assets until the storm passes.

We believe that staying invested is critical. History shows that every bear market has been followed by a recovery. After the Great Recession, the S&P 500 eventually went on to soar past its previous highs. It was a similar story after the pandemic-induced bear market. Within a few months, the U.S. equity market had recovered before reaching record highs. Investors who sat on the sidelines probably missed out on a lot of growth. That’s because trying to time the market is virtually impossible.

Take advantage of dollar-cost averaging

Dollar-cost averaging is a strategy that has you invest the same amount of money at regular intervals, no matter what’s going on in the market. It’s a common approach with 401(k) contributions. You’ll naturally purchase fewer shares when prices are high and more when prices are low. That could potentially lower your average cost per share over the long term. It’s also a hands-off approach that doesn’t require you to react to current market conditions.

Beyond that, a bear market might also be a good time to invest more in the stock market. When prices drop, many see it as an opportunity to buy stocks at a discount — and hopefully secure gains when the market eventually rebounds.

Diversify your holdings

Diversified portfolios have helped investors recover more quickly from past bear markets. The idea is to balance your portfolio with a variety of different assets, including high- and low-risk investments across a mix of sectors and industries. 

Exchange-traded funds (ETFs) and index funds can do much of the heavy lifting for you. They allow investors to scoop up baskets of stocks in one purchase, providing automatic diversification. They’re often seen as safer ways to invest in stocks. Acorns provides access to top-rated ETFs with as little as $5.

Maintain a healthy emergency fund

If most of your wealth is tied up in the stock market, what will you do if you need cash now? During a bear market, you may be forced to sell holdings at a loss. Having a strong emergency fund can make you less reliant on your investment portfolio. Most experts recommend socking away three to six months’ worth of expenses in a liquid savings account. If you’re retired or have irregular income, you might consider bumping that up.

Cash reserves can also help you avoid unwanted fees. Withdrawing funds from a 401(k) or traditional IRA before age 59½  typically triggers a 10% penalty and a tax bill. Dipping into your nest egg also depletes your retirement savings and robs you of potential returns in the future. It all underscores the importance of having an emergency fund.

Navigating a bear market can make investors uneasy, but history shows that these periods have been relatively short-lived. The best path forward usually involves sticking to your investment plan and keeping your eye on the long-term horizon.