During bear market periods, investing can be risky even for the most seasoned investors.
A bear market is a period of falling share prices. The technical definition is a 20% or more decline in share prices over at least two months.
In a bear market, investor confidence is extremely low. Many investors opt to sell their shares for fear of further losses, thus fuelling a vicious cycle of negativity.
Bear market phases
Bear markets typically begin when investor confidence starts to wane following a more robust trading period and rising share prices.
As investors grow increasingly pessimistic about the state of the market, they tend to sell off their investments to avoid losing money from the falling share prices that they anticipate.
This behaviour can cause widespread panic, and share prices can plummet when it does. When this happens, trading activity tends to decrease, as do dividend yields.
At some point during a bear market, investors will typically try to capitalise on the lower share prices by reinvesting in the market.
As trading activity increases and investor confidence begins to grow, a bear market can eventually transition to a bull market.
Origin of the term ‘bear market’
The term ‘bear market’ relates to the manner in which a bear tends to attack.
A bear will usually swipe its paws in a downward motion upon its prey, and for this reason, markets with continually falling share prices are called bear markets.
Bear market vs. bull market
A bull market is one marked by strong investor confidence and optimism. In a bull market, share prices go up.
The term ‘bull market’ is derived from the way a bull attacks its prey. Bulls tend to charge with their horns thrusting upwards into the air, so periods of continually rising share prices are called bull markets.
Unfortunately for investors, bull market periods that last too long can give way to bear markets.
Bear market vs. market correction
A ‘market correction’ is like a bear market but less severe. The technical definition is about a 10% decline in share prices in less than two months.
The idea behind a correction is that falling prices serve to ‘correct' the situation because prices have risen higher than they should have.
One significant difference between a bear market and a market correction is the extent to which prices fall. Bear markets occur when share prices drop by 20% or more, whereas corrections typically involve price drops of about 10%.
Furthermore, market corrections tend to last less than two months, whereas bear markets last two months or longer.
Examples of bear markets in Australia
There are several real-world examples of bear markets here in Australia. Most recently, the All Ordinaries Index (ASX: XAO) plummeted from an all-time high of 7,255.20 on 20 February 2020 to 4,564.10 by 23 March 2020, shedding 37% in the space of a month as global markets reacted to the coronavirus pandemic.
But this isn’t the only (or the sharpest) sell-off the Australian share market has experienced.
The bear market with the steepest fall occurred in 1987, sparked by the infamous Black Monday. This was the name given to the day the Dow Jones Industrial Average Index (DJX: .DJI) in the United States lost almost 22% and marked the beginning of a global share market decline.
Black Monday hit Australian shores on Tuesday, 20 October, resulting in the ASX losing 26% in a single day. From the beginning of October 1987 to 13 November 1987, the All Ords fell by 50%.
The global financial crisis (GFC), sparked by a cratering housing market and credit crunch in the US, saw the All Ords fall by 55% over 14 months, from its peak in November 2007 to its bottom in early March 2009.
Other examples include the 1929 Great Depression and the bear market that followed the dot-com bubble collapse in the 2000s, which saw the All Ords lose 21% of its value between March 2002 and March 2003.
Another occurred back in the 1970s in response to the quadrupling of oil prices by the Organization of the Petroleum Exporting Countries (OPEC), which prompted a US recession. That bear market lasted for 19 months (from February 1973 to October 1974) and saw the All Ords plummet a whopping 58%.