The Dow Jones Industrial Average (NYSE: DIA) broke the longest Bull Market in history on March 11, entering what is called a 'Bear Market'. The Bull Market started in March 2009 after the fallout of the 2008 financial crisis. On Thursday, March 12, the S&P 500 Index (NYSE: SPY), also fell into Bear Market territory, as the stock market experienced its steepest crash since Black Monday in 1987. The U.S. stock market closed its worst week since the 2008 financial crisis because of investor panic surrounding the COVID-19 outbreak and the falling oil prices from the disagreement between Saudi Arabia and Russia.
What is a Bear Market?
A Bear Market is a term used for when securities like stocks or market indices fall 20% or more from their recent highs due to negative investor sentiment. Although the term Bear Market is mostly used to describe declined in an overall market, individual stock can be considered to be in a Bear Market is they decline over 20% over for two or more months.
Bear Markets get their name from the way a bear hunts. Bears will attack their prey in a downward swiping motion; indices enter Bear Market territory by steeply declining downward. Conversely, a Bull Market gets its name by the way bulls attack their prey upward with their horns.
What Causes a Bear Market?
A Bear Market is usually caused by a weak or slowing economy. Signs of a slowing economy include low disposable income rates, drop in business profits and increased unemployment rates. Bear Markets arise when investors no longer feel confident in the market or the future economy, thus triggering major sell-offs like the ones seen this week.
What are the Types of Bear Markets?
Bear Markets are categorized two ways: cyclical or secular. Cyclical Bear Markets can last anywhere from a few weeks to a couple of years and usually end from a large Bull Market rally. On the other hand, Secular Bear Markets can last for decades. Bear Markets are considered secular when market gains are not sustained and indices have a below average rate of return for a sustained period of time.
How do I Trade During Bear Markets?
While Market Corrections usually seem like a great time to start investing due to the usual lower share prices, Bear Markets are hard to enter for it is impossible to judge where the market's bottom, or the end of the decline, will be. However, there are ways in which investors can still make high returns during a Bear Market. A popular, but very risky, technique is short selling stocks, which is essentially borrowing shares at one price and selling them back at a lower price when the market declines, thus making a small profit. But investor beware, for this method can cause heavy losses during market volatility due to the wild swings a market can take. For a less risker trade, look for Inverse or Bear ETFs, which are designed to change in value opposite of the security they track and increase during Bear Markets.