What Is Bear Market?
A bear market is a prolonged decline of 20% or more in stock prices. Learn what causes bear markets, how long they last, and what smart investors do during one.
Definition
A bear market is commonly defined as a decline of 20% or more from a recent high in a broad market index like the S&P 500. The term comes from the way a bear attacks -- swiping downward with its paws. Bear markets are characterized by widespread pessimism, declining corporate earnings, and investors moving to safer assets like bonds and cash.
Bear markets are different from corrections, which are declines of 10-20%. Corrections are relatively common (roughly once every 1-2 years) and usually short-lived. Bear markets are less frequent (roughly once every 3-5 years) but more severe, with the average bear market lasting about 9-14 months and producing an average decline of about 30-35%.
Since 1928, the S&P 500 has experienced over 25 bear markets. Notable examples include the Great Depression (1929-1932, down 86%), the 2008 Financial Crisis (down 57%), and the COVID crash of 2020 (down 34% in just 33 days, the fastest bear market in history). Despite these painful declines, the market has always recovered and gone on to new all-time highs.
Real-World Example
In 2022, the S&P 500 entered a bear market, falling about 25% from its January peak to its October low. Investors who panicked and sold near the bottom locked in their losses. Investors who continued buying through dollar-cost averaging accumulated shares at discounted prices. By late 2023, the market had fully recovered and reached new highs -- rewarding those who stayed invested.
Why It Matters
Bear markets are inevitable. If you plan to invest for 20, 30, or 40 years, you will experience several of them. How you respond determines your long-term returns. Historically, the biggest mistake investors make is selling during bear markets and missing the recovery. The best days in the stock market tend to cluster near the worst days, so sitting on the sidelines means missing both. Bear markets are also buying opportunities for investors with long time horizons and the discipline to stay the course.
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Frequently Asked Questions
How long does the average bear market last?
The average bear market lasts about 9-14 months, with an average decline of roughly 30-35%. However, they vary widely -- the 2020 COVID bear market lasted only 33 days, while the 2007-2009 bear market lasted 17 months.
What should I do during a bear market?
Generally, the best strategy is to continue investing through dollar-cost averaging. Avoid panic selling, and if you have extra cash, consider it a buying opportunity. Make sure your asset allocation matches your risk tolerance.
What causes bear markets?
Bear markets can be triggered by recessions, financial crises, geopolitical events, pandemics, rising interest rates, or the bursting of asset bubbles. Often, multiple factors combine.
Does a bear market mean a recession is coming?
Not always. While bear markets and recessions often overlap, a stock market decline does not guarantee a recession. The market is a forward-looking indicator and sometimes gives false signals.
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