What is a Bear Market?

A bear market is defined as one in which each successive decline carries the market to new lows. Falling prices and growing pessimism characterize a bear market.

By definition, a bear market is pretty simple. It’s when the market indexes fall 20% or more from the highs on a closing basis. One you may be familiar with was in 2008 and 2009 during the financial crisis. That was one of the worst we’ve ever had, with the S&P 500 falling more than 50%.

Then in March and April of 2020, the S&P500 fell nearly 35%. Those are obvious standouts, but they aren’t the only examples.

In fact, since 1926, a bear market has come along an average of about every six or seven years. The average bear market has lasted 1.3 years and with an average loss to the bottom of 38%. And that number factors in the Great Depression. The average bull market has lasted 6.6 years, with an average cumulative total return of 339%. Since 1926, it has been a bull market about 86% of the time.

Within a major uptrend or downtrend, several secondary reactions occur against the trend, lasting for a few days, weeks, or even months. Still, they don’t necessarily change the definition of the overall trend.

For example, in the stock market, prices may drop precipitously, even during a powerful bull market, for several weeks at a time. This is known as a “correction.” If the uptrend is still in place, a rally will then ensure.

If a rally movement doesn’t succeed in breaking through the previous high and the market subsequently declines to fall below a previous low, the movement has switched from a bull market to a bear market.

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