What is Bear Market?

What is bear market is an important question among investors during periods of sustained market dip. It happens when stock market prices drop from their recent highs by at least 20% and stay low for a long period. This often suggests a cautious market climate, low economic activity, and poor investor confidence.  
To put it briefly, a bear market is a reflection of general pessimism. Asset prices are still under duress, trade volumes are sparse, and investors are minimising exposure to risk. They are frequently linked to economic slowdowns, stricter financial conditions, and worldwide disruptions in India. 

Phases Of Bear Market 

There are typically four stages to the bear market in India. Let’s understand what is a bear market in depth.  

Initial Stage of a Bear Market: Excessive prices and an optimistic attitude among investors define the first stage. As this phase comes to a close, investors start to withdraw their funds from the markets and protect their returns. 

Second Part of a Bear Market: The second phase is characterised by an abrupt drop in stock prices. There is a decline in trading activity and corporate earnings, and a decline in previously optimistic economic indicators. As sentiment starts to decline, some investors get panicked. We refer to this as capitulation.  

Third Bear Market Phase: Speculators begin to enter the market in the third phase, which leads to some price increases and an increase in trading volume. 

Phase Four of a Bear Market: The fourth and final stage sees a gradual decline in stock prices. Bear in the share market gives way to bull markets when cheap prices and positive news start to draw investors once more. 

How to Recognise a Bear Market? 

You can identify what is a bear market with the key indicators given below. They include sustained negative market sentiment, declining corporate earnings, and increased volatility in stock prices.  

Declining Indices of the Stock Market 

A bear market is indicated by a downward trend in the main benchmark indices used in the nation, where investors would rather keep their funds or put them in low-risk products than make stock market investments.  

However, a bear market cannot be officially identified until there has been a 20% decline in these index values for a minimum of 60 days. This distinguishes fluctuations in the stock market caused by outside influences or economic uncertainties that may only have a temporary effect.  

Conversely, bearish markets release data that shows a nation's economy is contracting for a minimum of two months or longer.  

Recession 

People tend to hoard funds out of fear of losing them in the bear market. Investors who are knowledgeable about the workings of the stock market frequently adopt a mindset in such bearish situations. It expects higher stock market price falls, which accelerates the rate of such stock price declines. 

A recession was characterized by a sharp decrease in the general price level. It was brought on by a larger supply and a low aggregate demand for manufactured products and services.  

Consistently low demand and falling prices in most of the country's operating sectors are characteristics of such economic conditions. It reduces the GDP of the country.   

Negative growth is an indication of a severe recession. It correlates with high unemployment rates and unfavourable effects on stock market prices.   

Causes of a Bear Market 

A bear market can be caused by several international and economic causes. 

• High inflation reduces purchasing power and profitability.  
• Rising interest rates drive up borrowing expenses.  
• Global recession affects commerce and capital movements.  
• Lower economic growth and minimal business earnings.  
• Financial instability and global conflict 

In India, a combination of domestic inflation and global economic downturn often adds to lengthy bearish episodes. 

Types of Bear Markets 

Bear markets can be classified based on duration and underlying economic conditions. 

• Secular bear markets: Long-term periods lasting several years. Characterised by slow growth and repeated market downturns 
• Cyclical bear markets: Shorter in duration. Occur within a broader long-term growth trend 
• Event-driven bear markets: Triggered by specific shocks such as financial crises or global events. Each type impacts investment strategies differently. 

Examples of Bear Markets 

The 2008 Financial Crisis resulted in a bear market where the S&P 500 declined by 57% between October 2007 and March 2009. Let’s get to know more about this through examples. 

1929's Great Depression 

The Great Depression, which lasted for almost ten years and was caused by a bearish market trend, is said to have been the longest depression in modern history. Due to the massive speculative boom that preceded 1929, a large number of people bought inflated assets at prices that exceeded their absolute value. 

Due to this increase, businesses were forced to produce more than was necessary, which oversupplied the market. Deflation resulted from this sharp decline in the average price level, and the stock market was also affected.  

The great depression was initially signalled by the 1929 stock market crash. On October 24, 1929, also referred to as "Black Thursday". A huge volume of sales of roughly 12.9 million shares was registered, signalling the start of the share market bear market.  

Recession of 2008 

The subprime mortgage crisis in America and the failure of Lehman Brothers Holdings Inc., one of the largest financial institutions globally, precipitated a global financial downturn known as the 2008 recession.  

Due to globalization, India was also affected by this economic downturn. The Sensex's 1408-point decline on January 31, 2008. 

Indian investors adopted a pessimistic investment strategy during the global recession, preferring to keep their funds and place them in risk-free instruments. 

Market Correction vs.  Bear Market  

Investors can differentiate between short-term dips and sustained drops by knowing the distinction between a market correction and a bear market: 

• A brief drop from recent market highs of 10% to 20% is referred to as a market correction. 
• A bear market happens when prices fall by more than 20% and remain low for an extended period. 
• Market corrections are a common feature of regular market action and are frequently transient. 
• Bear markets are typically associated with more general financial or economic downturns. 
• Corrections tend to recover faster but bear markets may take months or years to settle. 

Consequences of a Bear Market 

Keep the following concerns in mind:  

• Decline in overall stock market valuations 
• Reduction in investor confidence and risk appetite 
• Slower economic growth and reduced business investment 
• Impact on employment and corporate earnings 
• Increased preference for defensive or low-risk assets 

How to Invest in a Bear Market? 

Investment requires careful planning; here are the following steps:  

Step 1: Review financial goals and investment horizon carefully 

Step 2: Assess portfolio risk exposure and asset allocation 

Step 3: Focus on companies with stable fundamentals and balance sheets 

Step 4: Maintain diversification across asset classes 

Step 5: Avoid decisions driven by short-term market movements 

Tips for Managing Your Portfolio in a Bear Market 

Experiencing a bear market for the first time as an investor may be rather unsettling. You may take some action to safeguard your investment and manage your portfolio. 

1. Diversify Your Portfolio 

Make sure your portfolio is diversified. Diversification is one of the ideal strategies to control risk in your portfolio. This involves making investments across a variety of asset classes. Gains from one investment might help balance losses from another when you diversify your portfolio. You don't need to spend a lot of time actively managing your portfolio to diversify it; investing in index funds can be a simple solution. 

2. Avoid Selling  

Selling assets is one of the worst things you can do in a bear market. Consider your long-term objectives instead. The wisest course of action is to hang onto your investments to benefit from the inevitable market bounce if your goal, such as retirement, is still several years off. 

3. Average Costs in Dollars  

A lot of people wait to invest until the market starts to improve. But timing the market is tough; even well-paid specialists don't always succeed at it. Alternatively, use a dollar-cost averaging technique in which predetermined amounts of funds are invested regularly. Dollar-cost averaging can help you create a diverse portfolio and eventually reduce your investment costs. 

4. Modify the Distribution of Your Assets  

It's essential to review your asset allocation as your needs change to ensure that it still supports your objectives. For example, you might be able to tolerate taking on greater risk in your portfolio if you have a longer period. But as you get closer to retirement, you might want to adopt a more cautious strategy and stick to lower-risk products like funds market mutual funds and bonds. 

5. Connect with a Financial Counsellor  

It's normal to have anxiety or discomfort when there is a bear market. See a financial professional if you're concerned about the strengths of your portfolio or anxious about achieving your future financial objectives. They can examine your bank account and investment holdings and assist you in creating a plan for financial security. 

Conclusion 

A bear stock market meaning is a severe and protracted loss in the price of assets. It is 20% or more from recent highs. A stock bear market is characterized by a gloomy investor attitude, potentially worsening economic data, and a general lack of trust in the market's future performance. Different things, such as economic downturns, geopolitical unrest, or changes in market sentiment, can start to bear markets. In order to safeguard their investments and limit losses, investors frequently respond by implementing defensive measures. Even though they can be difficult, bear markets are a normal part of the market cycle since they help to adjust values and open the door for ultimate recovery and resurgent growth. You can check out the many share market apps in order to invest in the share market.