Bear Markets Part 1: What Is It?

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Bear Markets Part 1: What Is It?

What is a Bear Market?

The investment community defines a Bear Market as one where the loss in a particular stock market of 20% or more occurs over a period of about 2 months minimally or longer. Losses between 10% and 20% are known as “Corrections” and generally happen in a shorter time frame.

Since 1946, there have been 13 bear markets, lasting anywhere from 1.5 months to 36.5 months and losing anywhere from 19% to 51%. Our last bear market occurred in 2007-2009, losing 51% over a 16 month period. Having 13 bear markets from 1946 to 2009 suggests an average of one occurring every 5 years or so. However, the length of time between bear markets has historically been as little as 2.5 years and as long as 13 years. But regardless of the magnitude or duration of a bear market, their declines are temporary compared to the long-term upwards movement of the market as a whole. Over time, stock markets have always continued upwards to make new highs, which is why we can rely on stocks as a long term investment.

Emotions and Market Behaviour

Although market movements are generally tied to the cycles in the economy, a great deal of the market ups and downs can be attributable to investor emotions. Optimism and hope are predominant during the market’s rising phase or bull market. These emotions however, are responsible for bidding up prices beyond reasonable valuations when hope and optimism turn into euphoria and over-confidence. As prices continue to rise, euphoria gives way to worry because the market then becomes overbought and expensive. At some point, usually triggered by a negative event, selling en masse begins. If the selling is severe enough, a bear market results. Now fear and pessimism become the predominant emotions instead, which will continue to drive prices down into excessive levels or oversold territory.

The bear market usually does not end until negative sentiment reaches the highest point and selling is exhaustive (panic selling). This point is known as “capitulation”, as most of the investors who wanted to sell will have done so. It also generally marks the start of the next bull market as fear and pessimism is washed out by waves of selling and glimmers of hope and optimism build again. This repetitive cycle of bear and bull markets has typically been the behaviour of the market for the past 100 years.

Stock market expansions and contractions

What To Do In A Bear Market

If we know that a bear market is just a temporary phase which the market goes through from time to time, and we have long term plans in place for our investments, then we should not be concerned about it. Since we know the long term trend of the market is up, we have no need to worry if our portfolios are made up of solid, well diversified investments. In fact, from a long term investing point-of-view, bear markets are good opportunities to add to our portfolio when stocks go “on sale”. Conversely, it is likely not a good time to be selling stocks as they will be sold at discounted prices.

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Each remaining part of this series will be published on a monthly basis. Please check back.

This article was prepared solely by Chad Ekren who is a registered representative of HollisWealth®, a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC). The views and opinions, including any recommendations, expressed in this article are those of Chad Ekren alone and not those of HollisWealth®. Capital Concepts and Capital Concepts Group are personal trade names of Chad Ekren. HollisWealth® is a trade name of Investia Financial Services Inc.