If you’ve been keeping up with the news lately, there’s been a lot of chatter about bear markets as worries about inflation and higher interest rates refuse to go away. And now that the economy is in the claws of a bear market, all that talk is here to stay.
On June 13, the S&P 500—which measures the performance of the stock market as a whole—officially dipped into bear market territory after falling more than 20% from its all-time high back in early January.1
But what exactly is a bear market? And what does it mean for you and your investments? Let’s dive into what a bear market is, why it matters, and how to keep calm when everyone else is freaking out.
What Is a Bear Market?
A bear market happens when stock prices drop by 20% or more from their recent highs. As a result, investors lose confidence and people start feeling pessimistic about the economy and the stock market.
So, why is it called a bear market anyway? Well, the term comes from the way a bear attacks its prey—by swiping its paws downward. When we’re in a bear market, that means the stock market is in the middle of an economic downturn that could last anywhere from several weeks to a couple of years. Here’s what might happen in the middle of a bear market:
- Stock prices keep falling and rising. Once we’re in a bear market, things can get really bumpy really fast. Volatility is pretty common in a bear market, which just means stocks can go up and down at a dizzying rate.
- Investors are worried and panicked. When investors are afraid to take on risks and worried about losing money, that’s another sign that the bears are on the prowl.
- Unemployment starts to rise. A bear market usually means the economy is slowing down—which also means businesses are less likely to hire new people or, even worse, forced to let people go.
- Consumer confidence drops. People usually go into conserve mode in a bear market, either because they’ve lost their job and need to focus on taking care of the essentials or because they’re afraid things might get worse.
- Businesses are struggling. If people aren’t spending money, that means some businesses might struggle to make a profit and stay productive.
What Causes a Bear Market?
A bear market can happen for any number of reasons—from a financial crisis (like the housing market collapse of 2008) to a bunch of fearful investors overreacting to a piece of bad economic news. Ironically, fear can sometimes keep a bear market going much longer than the thing that actually caused it in the first place.
Now that we’re once again in bear market territory, it makes sense to look back and see what brought us here. Every bear market happens for different reasons, so what exactly drove us into this current bear market? Well, there’s plenty of blame to go around:
- Inflation in the United States keeps hitting us where it hurts the most—our wallets. In May, inflation hit another 40-year high of 8.6% year over year, affecting everything from the price of gas to the price of eggs.2
- The war in Ukraine continues to drive fuel prices up, upset the food supply chain, and choke the growth of the global economy. The longer that conflict drags on, the worse those problems can get.3
- The Fed is raising interest rates in an effort to fight inflation. On June 15, they announced the largest rate increase since the Clinton administration.4 That might help slow down inflation, but it could also trigger another recession in the process.
- And then there’s the great crypto meltdown of 2022. Bitcoin and Ethereum are in a free fall—both cryptocurrencies have lost more than half of their value in just a few months’ time. And over the course of the past two months, more than $1 trillion has been wiped off the entire cryptocurrency market.5 Yikes.
When you put all these together, you have a perfect storm that could lead to the kind of stock market crash and bear market we’re looking at now.
How Often Do Bear Markets Happen? And How Long Do They Last?
We’re just going to tell you right now: We will experience bear markets from time to time. It’s going to happen! Wall Street has gone through seven bear markets (including this one) over the past 50 years, and they usually last anywhere from a few months to a few years.6
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Now that we know how long they last, how do we know when a bear market is over? After the market hits a low point, investors keep their eye out for a rebound from those lows along with consistent gains over the next six months. Once the market is up 20% from whatever that low point is, then the bear market is officially over.
For example, after the stock market became a bear market in the aftermath of the coronavirus outbreak, it took about a month for stocks to bounce back and rise 20% from their low point back in March 2020—making it the shortest bear market in history.7
Now listen—usually, a bear market sorts itself out and the economy bounces back pretty quick. But if stock prices continue to fall, it can trigger a recession. That’s when the economy stops growing for an extended period of time—usually two straight quarters or more of negative economic growth.
We still don’t know how long this current bear market will last (experts think it’ll definitely last longer than the last bear market during COVID-19). But it’s important to remember that bear markets and recessions are both normal parts of the economic cycle.
The stock market is like a roller coaster—there are going to be ups and downs and plenty of twists and turns in between. But the only people who get hurt are the ones who jump off. So keep your seat belt buckled and hang on!
What’s the Difference Between a Bear Market and a Bull Market?
A bull market is the exact opposite of a bear market—describing an economy with rising stock prices, high investor confidence and lots of optimism. If we’re in a bull market, that means Wall Street is charging ahead with stock values going up by 20% or more from recent lows. So if people are saying we’re in a bull market, that means times are good—and investors are expecting the good times to keep on rolling!
Thankfully, bull markets usually last longer than bear markets do. Since World War II, the average bull market has lasted for around four and a half years.8 In fact, after the 2008 financial crisis and the recession that followed, investors enjoyed the longest bull market run in history—which lasted just over 11 years until the coronavirus brought it to a screeching halt.9
An easy way to remember the difference between a bull market and a bear market is to think about how each animal attacks. While a bear slashes its claws downward, a bull charges forward and thrusts its horns upward. See? All those nature documentaries you watched when there was nothing else on TV are finally paying off!
How Is a Bear Market Different From a Stock Market Correction?
When Wall Street is on edge, you might hear the term stock market correction thrown around—but don’t get that confused with a bear market. A correction is a sudden 10% drop in stock prices from a recent high, but it doesn’t last very long—usually no more than two months. Think of a correction as a hiccup in the stock market.
So, if we’re in a bear market, that means the stock market has already gone through a correction—and then stock values dropped by another 10% or more to put Wall Street in bear market territory.
What Should You Do During a Bear Market?
Bear markets can be pretty scary. That’s because it’s hard to predict when they’ll happen, how long they’ll last, or how badly they’ll hurt your investment portfolio. And it’s never easy to see the investments in your 401(k) or Roth IRA take more beatings than Rocky Balboa in a boxing ring.
But it’s important to remember that they’re part of the natural cycle of the stock market. And guess what? Just like Rocky, the stock market always bounces back up. You just have to stay calm and ride it out. Here are four things you should do whenever we find ourselves in a bear market:
1. Don’t make decisions based on fear.
Fear is a terrible financial advisor, and the absolute worst thing you can do during an economic downturn is panic and take all the money out of your 401(k) and other investment accounts. Don’t do it! By pulling out of your investments, the only thing you’re doing is locking in your losses. Take a deep breath (or maybe get on the phone with an investment professional) and remember that this will pass.
2. Focus on the long term.
When you’re investing and saving for retirement, remember that you’re running a marathon, not a sprint. You need to zoom out of the current situation and focus on the long term.
3. Protect your Four Walls.
In a bear market, there can be a lot of uncertainty about your job and your income. If you happen to find yourself out of work during this time, make sure you go into conserve mode and take care of what we call the Four Walls—that’s your food, utilities, shelter and transportation. It’s okay to stop investing temporarily in order to keep the lights on and put food on the table.
4. Keep investing for retirement.
If your job situation is stable and you’re out of debt with a fully funded emergency fund, then stay the course and keep investing. The way we see it, a bear market means you’re getting mutual funds at a discount! Keep investing 15% of your gross income into retirement, and stay consistent with your investing strategy.
Work With an Investment Pro
When the stock market is struggling and everyone around you is running around like Chicken Little, it’s easy to get caught up in the craziness. That’s why we always recommend having an investment professional, someone who can guide you through tough economic times.
The SmartVestor program can help you find an investment pro in your area who can sit down with you and help you choose the right mutual funds to invest in. You need someone who can help you stay focused on your long-term goals and make smart choices that will set you on the path toward your retirement goals.
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This article provides general guidelines about investing topics. Your situation may be unique. If you have questions, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.