Bear Market – Definition

Definition of a bear market: a prolonged period of price falls in a financial market, such as the stock market.

What is a bear market?

A bear market is a gloomy period, in which investor expectations of future expected returns falls, and this in turn leads to a fall in the overall market value of financial instruments.

Equity bear markets and property bear markets are the bear markets which are most widely reported on by the financial press.

  • Likewise, growth investors (who rely upon price increases for virtually all of their returns) will be very alert to the long term trends of the stock market as this will directly impact their investment portfolio valuation.

When equity indices such as the FTSE 100 fall by 2% or more, this usually leads to some coverage in broadsheet or financial newspapers. However, where the stock market is officially termed to be a bear market, this can make national TV news.

Bear markets for government / corporate bonds or other major asset classes such as commodities generally receive less coverage, (except for gold and oil.)

The opposite of a bear market is a bull market.

Bear Market - Definition
The definition of a bear market is a finance concept

How is the phrase bear market used in a sentence?

“The UK stock market has entered bear market territory, having closed at a lower value for a second quarter running.”

What else you should know about bear markets

Bear markets are often confused with recessions, but these are not the same thing.

  • A bear market is a prolonged slump in the price of financial instruments.
  • A recession is a prolonged negative economic growth of a country.

The two often occur at a similar time, but a recession usually lags behind a stock market crash and bear market.

I’ll prove this with a real example; The Great Recession at the end of the 2010 decade.

The Office for National Statistics reports that the UK economy contracted by 0.3% in 2008 and a further 4.3% in 2009. The recession – defined as two successive quarters of negative economic growth – was declared at the end of Q3 2008.

However, the UK stock market entered bear market territory in July 2008 – a quarter earlier.

This is because investor expectations (and prices along with them) can change in an instant, leading to sudden and sharp price drops over a period as short as two weeks.

In contrast, an economy changes direction at a slower pace. Companies, for the most part, are ‘locked into’ a level of costs and revenues in the short term at least:

  • A full order book may provide a company with a backlog of paid work lasting months into the future. This insulates a company from a sudden drop in orders.
  • Companies may supply goods or services over fixed periods, such as a year which is set out in a contract and cannot be changed without penalty to the customer.
  • Although struggling companies will seek to cut costs by laying off some of the workforce, it can take several months for this occur. The rules which govern redundancies require the workforce to be given notice and for consultations to be held over several weeks. This builds in a time-delay between a drop in economic activity, and a drop in household income.

These factors help to explain why recessions happen in slow motion, compared to bear markets.

How does the definition of bear markets relate to investing?

Bear markets and market timing

As bear markets are part of the financial cycle of the capital markets, this concept is tightly connected to market timing.

Market timing is the investing practice of choosing the right moment to buy shares and deciding when is the right time to sell shares.

I personally believe (and some of the best-investing books and investing courses support this view), that market timing is so difficult that it’s virtually impossible for the average retail investor to find long term success.

When looking at bear market examples with hindsight, we can begin to feel overconfident in our ability to have predicted the fall in advance.

When actually sat in the market, live, looking ahead, it’s very difficult to make this kind of decision.

For every investor who sells their shares ahead of a market slump, there is probably an investor who sold their shares prematurely, only to watch the stock market soar while they were invested in risk-free asset classes instead.

However, only those who experience good luck and success in their attempts will be shouting and blogging loudly about it, which can overstate the observable success rate of these strategies.

Bear markets may offer good value

Investors who stick to a ‘buy and hold’ or dividend growth investing approach may place a positive spin on living through a bear market period.

Lower prices mean that shares can be bought with a higher dividend yield. It generally costs less to buy each future £1 of dividend income if you can buy while share prices are depressed.

The same principle applies when investing in property. If you can buy during a dip in prices, you should be able to achieve a higher rental yield once the economy has somewhat recovered.

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