Bear Markets and Investing

A Bear Market is one in which share prices are falling. It may refer to the market as a whole, or only to a specified sector. For example, a bear market in gold lasted from January 1980 and did not end until June 1999, during which time the price of the precious metal fell from around $850 per ounce all the way down to $253 per ounce. Another instance of a sector bear market was that caused in the high technology sector by the collapse of the “dot com bubble” in early 2001. Moreover, a bull market in equities often coincides with a bear market in bonds, and vice versa.

Investors with negative market outlooks can be said to be “bearish” on the market’s prospects, meaning they have little confidence share prices will rise in the short to medium term. As it is these very same investors who drive market performance, these bearish sentiments are often a self-fulfilling prophecy and lead to a full-fledged bear market, not merely a correction. Only once confidence is regained, can a market pull out of its bearish phase and resume its historic rising trend over the long term.

It’s not certain where exactly the phrase “bear market” originated, although there are a number of theories. Some theories relate to a bear's natural habits, such as going into “hibernation” for a time, or attacking oncoming threats with a downward thrust of the claws, indicating the downward trend of the market. Yet another theory is that a bear market refers to the competitive nature of two famed banking families, the Barings (as in Barings Bank) and the Bulstrodes. Images of the bear and bull are often used to accompany financial articles, much in the same way the donkey and the elephant are used to represent the Democratic and Republican parties.

The most notorious bear market in history was the Great Depression of the 1930s, following swiftly on the heels of the Roaring Twenties (one of the longest bull markets - upward thrust of the horns) and precipitated by the Great Stock Market Crash of 1929. This was a true bear market, not a market correction after which bull markets resume their upward trend. Both the 1987 and 1997 market corrections, though steep and shocking at the time, did not change the overall bullish trend of the markets. A bear market like the one which lasted from around the time of the 911 attacks though the end of 2002 was a genuine, though short-lived, bear market.

There is a silver lining to bear markets, however. Investors know that eventually, any bear market will end and the markets will recover. Thus, bear markets present opportunities for bargain hunting, and companies with good fundamentals can often be bought at good values.

 

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