A bear market is long-term (secular) decline in the stock market. Some technicians like to make an exact science out of the definition by proclaiming that a bear market is a market that has declined by at least 20 percent. In any case, it is fair to say that a bear market is much more than a simple correction, involving the majority of listed stocks.
The old Wall Street adage that “bear markets come like a thief in the middle of the night” is truer than ever. Just as bull (up) markets begin during the depths of massive investor liquidation and recession/depression; bear markets begin during massive investor optimism and roaring expansion. While old market adages are often pooh-poohed for a while, they eventually prove true at crucial moments.
It is the constant comebacks in a giant bull market that creates the environment that makes for gutsy investors and a belief that each decline is followed by new highs. Wouldn’t it be nice if that was the way it really worked? Well it doesn’t and that’s why it is important to be prepared. Never get into the mindset that we are in a new era or a new paradigm that bear markets have been repealed. This is what happened during the end of the Dotcom Bubble.
Bear markets are a reality; they create fear, uncertainty and loss of confidence. When stocks hit bottom and turn up to begin the next bull market — loaded with opportunities — most people simply don’t believe it. They’re hesitant and afraid. Why? Most new investors, even professionals, are still licking their wounds. Without a system of cutting losses, or a way to interpret general market action, most people lose money and get hurt during bear markets.
Generally speaking, bear markets tend to have three stages of declining prices. These declines are interrupted by significant short-term advances. During the early stages of a bear market, these advances will draw investors into the market because of their belief that the declines are just another in a series of corrections that have occurred many times during the prior bull market. Eventually these rallies breakdown and the market moves to new lows.
In the end, a secular declining market will run its course, just as a bull market will run its course. As volume dries up on each decline and the public’s mindset is deeply negative, each day brings a close day to the end of a bear run. Eventually and often during the darkest time, the market begins to move higher. Another old Wall Street adage then comes into play, early on “bull markets climb a wall of worry” — at least until we near the end of the bull run.
Quote of the Week: “I only buy when blood runs in the street.” — Baron Rothschild
Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.