Bear markets are significant downturns in stock markets that generally last between one month to 1.7 years. These periods, characterised by a decrease of at least 20 per cent in stock prices, can coincide with economic recessions. Although bear markets can be unsettling, they also present opportunities for long-term investors to purchase stocks at lower prices, potentially mitigating risk and positioning for future gains. As an investor, you must learn about bear and bull markets and patterns related to it. This resource link can help you to learn investing and that too from professional education firms.
The Great Depression 1929-1939
Be wary of falling markets that suggest selling everything to raise cash, though. Instead, if your portfolio meets long-term financial goals, wait out any inevitable recoveries and see if your holdings ultimately pay off.
One of the worst bear markets ever experienced was during the Great Depression (1929 to 1939), which saw the S&P 500 decline by up to 50 per cent due to rampant speculation and the removal of Smoot-Hawley Tariff protection, leading to the massive stock market bubble burst. Following this event came an economic recession brought on by the Federal Reserve’s attempts at raising interest rates to combat inflation.
Oil Shock Recession was another notable bear market between 1976-1977. This event was caused by concerns over corporate profit growth in the future, higher energy prices that drove inflation higher, and rising interest rates to balance out an overheated economy.
Bear markets have historically only emerged every 3.6 years on average. Hence, investors must remember that even during distress, they typically remain positive over the long term despite bear markets’ scary appearances. It is also essential for them to remember that these fluctuations do not portend an imminent recession; only half of the bear markets since 1928 have coincided with recessionary conditions.
The 1973-1974 Stock Market Crash
Bear markets that occur alongside economic recessions tend to be far more intense and damaging than market corrections, lasting for longer and having an even more significant effect on investor sentiment and confidence in the economy. They also lead to more substantial decreases in the stock market’s price level.
The 1973-1974 stock market crash was one of the worst ever experienced by our country. It was precipitated by several factors, including a growing oil crisis (caused by Arab nations imposing an oil embargo against us as revenge for our support for Israel on Yom Kippur), rising inflation caused by rampant speculation and political unrest as Richard Nixon faced impeachment proceedings. At the same time, Spiro Agnew resigned as vice president.
At the start of 1973, when the Dow reached an all-time high near 1000 points, Barron’s published an article entitled “Not a Bear Among Them.”
But, soon enough, the market plunged into an extended bear market that lasted almost 21 months, dropping the Dow by over 50 per cent between its peak and trough points. At that time, it was the longest bear market ever witnessed by our country, and shortly afterward, we experienced a recession lasting well beyond 12 months.
The Dot-Com Bubble Burst 2000-2002
The dot-com bubble burst in 2000 was a dramatic stock market crash that cost many investors billions of dollars in losses, sparking a global financial crisis due to over leveraged balance sheets at central investment banks and Bear Stearns and Lehman Brothers’ respective collapse. This crisis also resulted in Bear Stearns and Lehman Brothers declaring bankruptcy at this point, further compounding and prolonging their problems.
Bear markets typically occur before recessions and end shortly before economic contractions hit bottom. Since 1929, the average bear market lasted 9.6 months and was relatively frequent.
Investors experience various emotions during a bear market, including fear and despair; it’s important to remember that the long-term performance of stocks has historically improved after bear markets have passed.
Investors can take advantage of bear markets by short-selling stocks or ETFs, purchasing inverse ETFs, and using put options. It is important to remember that it can be challenging or impossible to forecast bear market bottoms accurately; thus, short-term trades in such an environment should generally be avoided in favor of long-only strategies.
The Global Financial Crisis 2007-2009
In 2008, the global economy almost collapsed following an unprecedented bear market and recession that destroyed 57 per cent of the S&P 500 Index value – marking one of the worst bear markets ever and lasting several months. Central banks across the globe intervened with unprecedented measures such as quantitative easing to prevent its complete failure and save the financial system from imminent destruction.
As many investors recover from the 2008 crisis, hope remains. Bear markets offer investors an incredible opportunity to purchase much reduced risks; experienced traders know how to take advantage of falling markets by short-selling, buying inverse ETFs, or purchasing put options.
Bear markets and recessions are natural parts of the business cycle and can contribute to more sustainable economic development. Recessions allow an economy to reallocate resources more effectively, thus setting the stage for future expansion.
Even though it can be distressing to watch your investment portfolio decline in a bear market, if your asset mix matches your timeframe, risk tolerance, and financial goals, staying the course and riding out the volatility is usually wiser.