Investing Essentials What is a bear market?

Bear markets vs. bull markets: A quick overview

Bear markets and bull markets indicate two aspects of market trends. They don’t specifically refer to the ups and downs of individual stocks (or even the ups and downs of sectors within the market), but the market as a whole.

Markets that are trending upward are called bull markets; in contrast, markets that are trending downward are called bear markets. But a few days or even weeks of stocks losing value doesn’t necessarily point to a bear market.

Here’s an at-a-glance breakdown of the differences between bear and bull markets.

And with all this in mind, what else defines a bear market?

Characteristics of a bear market

A bear market is defined as a drop in a market index by 20% or more. Although individual stocks may fall 20% or more from their highs and stay there for weeks, months or even years, the market itself – which is made up of stocks – may continue to gain.¹ In that case, the market is not in a bear market – even if your investment in the underperforming stock might feel like it is.

However, the sentiment of general economic decline that accompanies a significant drop in the markets indicates that you’re in a bear market. The most recent bear market, which began in January 2022, kicked off with surging inflation, rising interest rates, the war in Europe and soaring gasoline prices. Securities markets from stocks to bonds to cryptocurrency all tumbled as investors worried that investments were too expensive given the economic situation.

Another key characteristic of bear markets is an investor preference for safety and capital preservation. In practice, this often leads many investors to either rebalance their portfolios, gradually increase stock exposure within them or simply sit tight for the duration of a bear market.

What is a secular bear market?

A secular bear market is, at its most basic, a bear market that simply lasts a long time. What “a long time” means depends on a lot of different factors, though, including your age and current stage of life.

The bear market in stocks that followed the Great Financial Crisis of 2007 to 2009 lasted just over a year. However, the housing price bear market in certain cities across the country – the sector that was arguably hit hardest by the Great Recession – lasted for many years. In this case, the housing market was in a secular bear market compared to the stock market.

Why is it called a bear market?

Strangely enough, the etymology behind “bear market” is hard to pin down. One theory is that the terms “bear” and “bull” were pulled from popular forms of entertainment in early-1700s London.² Bears and bulls would fight dogs in outdoor arenas, with bears often swiping down to attack and bulls usually swiping up.

Another theory draws from the early bear furs market in North America that was defined by speculation – a market in which a merchant would sell a bear fur on speculation at a high price in hopes of buying it back from fur trappers at a lower price.³ If this sounds familiar, it’s because it resembles short selling in today’s markets.

Whatever their etymological roots, “bear market” and “bull market” can both evoke a sense of caution and alertness. Perhaps this is why they have embedded themselves so deeply into the psyches of investors.

Bear markets throughout history

Since 1942, there have been 14 bear markets in U.S. stocks, as represented by the S&P 500.⁴ These bear markets range in depth and severity, from a 20.6% decline in the bear market of the late 1940s to a 56.8% decline during the bear market of the Great Recession in 2009.⁵

In terms of length, the downdraft in 2022 caused by the outbreak of the COVID-19 pandemic created a bear market that lasted three months. This is in sharp contrast to the bear market in stocks of the early-to-mid 1970s, which lasted nearly two years. The average length of a bear market during that time was 16.79 months, with a mean cumulative loss of 48.2%.⁶

Other bear markets have lasted longer, though, such as the housing price bear market following the Great Recession and the bear market in oil from 2014 to 2016. Just as the former depressed house prices for many years after the rest of the economy had recovered, the latter had lasting, negative impacts on oil producers. When we look at the long view of history, however, it’s clear that no market or commodity stays in a bear market forever.

Investing in a bear market

It’s worth noting that investing in a bear market is not quite the same as being invested in a bear market. Whereas investing requires an active approach, being invested can be as simple as doing nothing.

If you’re worried about the direction the markets and the economy are heading, your first step is to reassess your risk appetite. Think about how you felt during the last economic downturn; if unpleasant feelings bubble up, you probably have a lower risk appetite. Conversely, if you discover you have a higher risk tolerance, then you can actively explore and implement investment strategies that may perform better in bear markets.⁷

Bear market considerations

If bear market declines are too much to handle, there are steps you can consider taking to simultaneously stay invested and help you navigate risk.

• Keep enough cash in your emergency fund to cover unforeseen expenses so that you don’t have to sell your investments when you need money fast.
• Consult with a financial advisor or a certified financial planner to strategize your next moves.
• Consider investing in funds that offer portfolio diversification and specific strategy options for bear markets, which may help, even though diversification does not guarantee a profit or protect against a loss.
• Rebalance your portfolio for diversification.

Roth conversions in bear markets

Bear markets may be a good time to consider completing a Roth conversion.

Roth IRAs have certain advantages: Unlike traditional IRAs, you aren’t required to take required minimum distributions (RMDs) with a Roth IRA (except inherited Roth IRAs) and any growth of your assets is tax-free when you take a “qualified distribution” (as defined by the Internal Revenue Code). If you have a traditional IRA that has lost value during a market downturn, it may be a good time to consider a Roth conversion as the taxable basis is lower than it may otherwise be during a bull market. Once the conversion is made, the newly transferred money may grow tax-free for as long as you keep it in the Roth IRA. Note that the conversion itself is a taxable event.⁸

When converting cash or securities from a traditional IRA to a Roth IRA, there are other factors that go into assessing the tax impact of the conversion. If you would like to complete a Roth conversion, speaking to a tax professional can help you determine the tax implications of doing so.

Look for bargains – they might be out there

Although a bear market may seem frightening at first – particularly if you notice an immediate drop in your portfolio’s value – there are still investment opportunities available. For example, you may be able to purchase some of your favorite investment products at lower prices.

In other words, a bear market could be an opportune time to put your cash reserves to work, but make sure to do you research first. If you don’t already have an ample cash reserve on hand, it’s a good idea to start building one, either to build a cushion or expand your holdings if it makes sense.

Getting started

The good news is that there are ways to help preserve your wealth and even possibly put your capital to use in a bear market. For experienced investors with a greater risk tolerance, a bear market may be an opportunity to turn these lemons into lemonade. Remember, though, that bear markets are full of uncertainty – it’s wise to consult with a J.P. Morgan advisor before making your next move.