When financial markets experience a widespread and substantial decrease, the prevailing economic conditions are referred to as a “bear market.” This is the opposite of a bull market, a market which is rapidly rising in value. When markets turn bearish, the results for investors and the general public can be nerve wracking. If a bear market persists, it is possible to enter into an economic depression. Bull markets, on the other hand, tend to generate widespread optimism as well as profits, with investors hoping that the market doesn't turn out to be a bubble.
People distinguish bear markets with different indicators. As a general rule, a true bear-style market is accompanied by serious pessimism among investors. Investors turn conservative, hoarding their portfolios and making cautious investments. This drives the market down even further, ultimately leading to a market decline of as much as 20%. A bear market also impacts multiple markets; in the United States, for example, both the NASDAQ and S&P indexes will start to fall. A decline in one market alone is not a bear, although it could mark the start of one.
During a bear market, people tend to sell off their stocks, in the hopes of making a profit while they can. This can trigger a depression, with mass sales driving general panic. Some investors also engage in short selling, a potentially risky investment process in which they sell borrowed stocks off in the hopes of buying them back later at greatly reduced prices, keeping the difference in price. This can be dangerous if the market does not go as predicted.
It is important to distinguish a bear market from a correction. A correction happens when inflated stock prices fall to a more natural level. It is a more short term drop in stock and security values, and while it can be difficult to ride out, it is not characterized by mass pessimism and frustration with the downturn in the market. During a correction, savvy investors can purchase good stocks at lower prices, potentially turning a profit when the market surfaces from the correction.
Several things can trigger a bear market. Typically, the market downturn will be accompanied by a general recession, characterized by high unemployment and rising inflation. In addition, key indexes such as housing values will tend to fall rapidly. In the United States, one of the most well known bear markets was in the 1930s, during the Great Depression. Another emerged in the mid 1970s, a result of the stagflation economy.
