What is a bear market?

In the world of investing, you often hear terms like 'bull market' and 'bear market.' These terms refer to the general trends or direction in which a market is moving. A bear market is a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. The term 'bear market' can apply to anything that is traded, such as bonds, real estate, and commodities, but it is often used to refer to the stock market.

Bear markets are typically associated with declines in an overall market or index like the S&P 500, but individual securities or commodities can be considered to be in a bear market if they experience a decline of 20% or more over a two-month period.

For example, let's say that the S&P 500, an index that measures the stock performance of 500 large companies listed on stock exchanges in the United States, is at a high of 3,000 points. If it were to fall to 2,400 points or lower, a drop of 20% or more, we would be in a bear market.

Bear markets can last for months to years and are often associated with severe economic downturns, recessions, or depressions. During these times, investor confidence is low, and many may sell off their investments in fear of further losses, perpetuating the downward spiral.

On the other hand, savvy investors often see bear markets as buying opportunities, 'buying the dip' in anticipation of a future market recovery. It's important to remember that the market is cyclical, and bear markets are a natural part of the investment cycle.

Bear markets can be challenging for investors, but understanding what they are and how they work can help you prepare for and navigate through them.