A bear market is when a stock index such as the S&P 500 falls 20% or more from its recent high. Bear markets are a normal part of investing: the S&P 500 has had roughly one every five to six years since World War II, and it has recovered from every one of them.
Bear market vs correction vs crash
| Term | Drop from peak | Typical speed |
|---|---|---|
| Pullback | 5% to 10% | Days to weeks |
| Correction | 10% to 20% | Weeks to months |
| Bear market | 20% or more | Months to years |
| Crash | A very sharp fall | Days |
The opposite is a bull market, a sustained rise, usually counted as a gain of 20% or more from a low.
How long do bear markets last?
Since 1946, S&P 500 bear markets have lasted about a year on average, with an average fall of roughly a third. Some are short: in 2020 the index fell about 34% in just over a month. Others drag on: the 2007 to 2009 bear market lasted about 17 months and cut the index by more than half.
Bull markets have lasted much longer and gained far more than bear markets have lost, which is why long-term investors have been rewarded for staying in.
What causes a bear market?
- A recession or fear of one.
- Rising interest rates and high inflation.
- A burst bubble in an overvalued part of the market.
- Shocks such as a financial crisis, war or pandemic.
A bear market does not always mean a recession, and stocks often start recovering before the economy does.
What to do in a bear market
- Do not panic sell. Selling after a big fall locks in the loss, and the best days often come close to the worst.
- Keep investing. Regular contributions buy more shares at lower prices. See dollar-cost averaging.
- Check your mix. Make sure your split between stocks, bonds and cash fits your timeline.
- Hold enough cash. An emergency fund means you are not forced to sell at a bad time.
- Rebalance. Moving some money from what held up into what fell keeps your plan on track.
- Near retirement? Keep a few years of spending in safer assets so you are not selling stocks low.
Why it is called a “bear” market
The usual explanation is that a bear swipes its paws downward when it attacks, while a bull thrusts its horns upward.
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Frequently asked questions
Is a bear market a good time to buy?
For long-term investors, lower prices have historically led to better future returns, though prices can keep falling first.
How do I know when a bear market is over?
Only in hindsight. A new bull market is usually declared once the index is up 20% from its low.
Do bonds fall in a bear market?
Often they hold up better than stocks, but not always. In 2022 both fell together as rates rose.
This article is general information, not financial or tax advice.
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