The transformation of a bull market to a bear market follows a cycle of ups and downs. The upward valuation of securities to price peaks are referred to as bull markets, and the inverse valleys are bear markets. This article will define what a bear market is in more detail by discussing its impact, signs, and historical reference of past bear markets.
So what is a bear market?
Investopedia said that the name bull and bear market is traced to the movement the animals make when attacking prey. A bull will toss it’s horns into the air (upswing) and a bear will swat it’s prey down (downswing). So with this visual in mind (though it’s origins are questionable), the definition of a bear market is when overall stock prices are going down, and investor confidence is very low. While
What are the signs of a bear market
There are a variety of signs that tip people off that a bear market is descending, some obvious, some not so much.
One of the most obvious signs is a global market or financial disaster, similar to the Dot Com burst of the nineties or the Great Recession. Inevitably these huge upheavals shook investor confidence and a bear market immediately followed, lasting for close to two years before any signs of a bull market started to appear.
When big businesses start posting continuous losses over multiple quarters, it can be a signal of a bear approaching. With dropping profits, investors will lack confidence in the long term potential and a sell off can occur. Sometimes this can become a self fulfilling prophecy and can trigger a massive surge in the market, which is bad.
Debt. It’s a single word that conjures up enough imagery to scare most people. When homeowners increase in defaults, or home prices fall, and interest rates rise, already cash strapped people find themselves in desperate situations. Extending it further, entire countries can find themselves in a default situation (think Greece) and all of this activity will again cause investors to move assets to safe havens, causing a bear market. Debt problems on an individual or a governmental (US Debt Limit) can easily indicate a shift in sentiment.
The economic impact of a bear market
Similar to the bull market, there is no direct impact of a bear market, rather it is a reflection of the economic indicators at that given time. Unemployment increases, profits fall, taxes rise, wallets empty, and consumer confidence becomes shaky, causing people to spend less on the extras and focus on savings, and the bare minimums.
A bear market is never a fun market to invest in, but for the smart investor, knowing when the bull is about to charge can help them pick up great deals on stocks that could have been too expensive a few months ago.