A bear market has a sustained downward trajectory over time and towards which investors are not very optimistic about a rise.

This type of market is also known as a bear market. In a bear market, negative sentiment takes over investors, and the downward trend only worsens due to the general pessimism surrounding the market. We call it a bull market when the opposite happens and optimism prevails, causing it to go higher and higher.

There is a frequent debate among analysts and investors about how sustained and dramatic a market decline must be for it to be considered a bear market.

These conditions are not the only ones for which a market can fall. Corrections are shorter dips that typically last less than twice, and crashes are sudden dips that can cause negative results.

Characteristics of a Bear Market

Sooner or later, the bear market in the stock markets will return after six years of the bull market, maybe sooner rather than later. It is impossible to anticipate when it will start, how long it will last, or what magnitude it will have, but some things can identify about the next bear market. Paul A. Merriman, the founder of Merriman Wealth Management, has detailed 22 characteristics of every bear market. Given the length of the analysis, we will divide the article into two parts:

  1. What is a bear market? Although the term is applied very loosely, there is a generally accepted real definition: A bear market declines 20% or more, lasting at least 60 days.
  2. If the drop is more than 20% but lasts for less than two months, it is considered a correction rather than a bear market.
  3. A bear market is triggered when investors lose trust in the market as a whole and demand for stocks declines. It tends to occur when the economy is entering a recession, unemployment is high, and inflation rises.
  4. Bear markets are normal but not prevalent. Over the earlier 200 years, the stock market has escalated more than it has fallen. The bear market represents only a minority in market history, but that minority is pretty nasty.
  5. Like earthquakes, bear markets are difficult to predict but especially dangerous for those unprepared. Later 1929, the US stock market has experienced 25 bear markets, an average of one every 3.4 years.

More Information:

  1. Statistically, we are behind. More than six years ago, the most recent bear market ended in March 2009.
  2. Also, like earthquakes, bear markets don’t last forever. Those 25 bear markets lasted, on average, ten months.
  3. Also, like earthquakes, bear markets can be relatively mild or very harsh. The average bear market loss is 35%. The smallest loss was 21% in 1949; the worst was a 62% drop from November 1931 to June 1932.
  4. Many of today’s investors have suffered through two pretty nasty bear markets: The 58% decline from 2000 to 2002 and the 57% drop from 2007 to 2009.
  5. Bear markets scare those who are not prepared for them. Millions of investors remain jittery after the 2008 crash. They have missed out on a strong and sustained rally by holding cash.
  6. The history of the markets is not all bad. Meanwhile, the 25 bull markets in 1929 have lasted an average of 31 months – three times longer than the average bear market. The usual of these bull markets sent stocks up 107%.

Indicators of a Bear Market

Indicators of a Bear Market

A bear market is a 20% or extra market decline based on fundamental economic indicators, lasting over an extended period. We believe that bear markets can identify in advance with careful analysis and research, and the decline mitigated, at least in part. Don’t forget, though, that no one has systematically and accurately pre-empted every bear market.

In our opinion, bear markets start in two ways: with a wall of concern or with a bump. The wall refers to the idea that as bull markets progress, the most common fears of investors are assumed and disappear. These fears become the bricks that form the wall that will eventually lead to soaring expectations and euphoria taking over investors. The bump occurs when a big enough unexpected event drops world gross domestic product (GDP) by several percentage points.

Some pointers distinguish negative fundamental economic data, euphoric investor sentiment, and potentially major negative factors. Although they can be useful, we do not believe that one alone can accurately predict a bear market.

Negative fundamental economic data

Indicator

  • Weak business profits
  • Inverted Yield Curve
  • Deterioration of sales growth
  • Stock build, low demand
  • Trend, not data points

Description

  • Are the earnings of companies listed on stock markets slowing or falling for several quarters?
  • The yield curve measures long-term interest rates compared to short-term rates. Are the interbank rates higher than those of the 10-year debt? It could mean that banks have no incentive to lend and that credit will be tightened in the future, potentially causing a drop in economic activity – and stock markets.
  • All external factors can affect profits, but sales are affected to a lesser extent.
  • Are our business stocks piling up while consumer demand appears to be declining?
  • One piece of data is not sufficient proof of anything. The trend should repeat several times and in many countries simultaneously.

The feeling of euphoria in the investor

Indicator

  • Large leveraged buyout (LBO) activity
  • Initial public offerings (IPOs) at excessive prices
  • Corporate debt growth
  • General optimism in the press
  • “This time, it’s different.”
  • Euphoria

Description

  • Are companies borrowing to acquire competitors or other companies?
  • Are extremely low-quality, exorbitantly priced IPOs – private companies that go public to raise funds – in excessive demand? And also, are they going public to go public?
  • Are companies borrowing to finance themselves, despite the trend of slowing, or even contraction, of sales and profits?
  • Is the media optimistic for a good reason? Those who were already optimistic, are they now euphoric?
  • Is there a widespread debate that “this time is different”?
  • Is everyone talking about the market? Watching the stock market news instead of following the football? Are investors flocking to collective investment institutions? Is the taxi driver giving you investment advice?

A bump big enough to cut global GDP significantly

Indicator

  • Tariff escalation/trade war
  • Monetary Policy Errors
  • Regulatory changes
  • Serious geopolitical conflicts
  • Other unknown negative factors

Description

  • Are countries putting up dissuasive trade barriers?
  • Have any of the major central banks made a big mistake?
  • Have massive changes in accounting regulations or standards that may negatively affect companies?
  • Is there a high probability that a major international conflict will arise?
  • Is there any other circumstance that is capable of ruining the world economy?

A common misunderstanding is that regional geopolitical conflicts can lead to bear markets. According to the table above, a geopolitical conflict must be very serious and global in scope to stop a bull market – that is, a sustained period of rising stock prices. Smaller regional competitions often do not have sufficient destructive capacity. For example, the current bull market has already overcome fears around the conflict between Israel and Hamas, the Russo-Ukrainian crisis and missile tests in North Korea; in fact, these fears have become bricks to build the wall of worry this bull market has already breached. Even when world powers get into a regional war, they rarely derail a bull market if the conflict does not exceed those geographical boundaries.

Also Read: Free Market Economy and Planned Economy – Bloomberg Blog 2022

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