Bear market
What is Bear market?
A bear market is a sustained period of broadly falling asset prices, commonly described for equities as a decline of at least 20% from a peak.
A bear-market display should not imply that the precise low was investable. Report data frequency and transaction assumptions, and separate peak-to-trough measurement from the return of a strategy that rebalanced or received cash flows during the episode.
Definition and measurement
The 20% convention is widely used but not an economic law or universal official standard. Classification depends on the index, currency, total-return treatment, and whether closing or intraday prices set the peak and trough. A national index can enter a bear market while global equities do not, and severe declines in individual securities do not necessarily define a market-wide episode.
Causes and patterns
Bear markets can reflect recession, inflation, tighter policy, credit stress, war, valuation compression, or a reassessment of expected profits. They need not accompany an official recession. Declines usually include sharp countertrend rallies, and the final low is recognized only afterward. Different sectors, styles, and countries can peak and recover on separate dates.
Investor experience
A 20% loss requires a 25% subsequent gain to recover, while a 50% loss requires 100%. Sequence matters for investors withdrawing funds because sales during the decline reduce capital available for recovery. Report drawdown depth, duration, recovery time, dividends, inflation, and currency rather than using the label alone to characterize the economic damage.
Portfolio response
A predetermined rebalancing and liquidity policy helps avoid improvised decisions under stress. Rebalancing toward equities can restore target risk, but only if spending, leverage, and near-term obligations remain secure. Tax-loss realization and exposure replacement may help taxable investors. Concentrated, leveraged, or illiquid portfolios require more careful triage than a diversified unlevered long-term allocation.
Practical risk controls
Stress losses before investing, preserve an adequate liquidity reserve, and know which positions can be sold under impaired markets. Distinguish temporary price decline from permanent impairment in the underlying security. Do not wait for a 20% headline to acknowledge risk, and do not assume crossing it predicts another decline. Market labels are retrospective descriptions rather than stand-alone trading signals.
Sources and further reading
- What is a Bull or Bear Market?, Investor.gov, U.S. Securities and Exchange Commission