There’s been a lot of talk recently about bear markets, how we are potentially entering one, and how this could indicate the beginning of a deeply troubling time in the financial world. But what exactly are bear markets, and what happens next?
Put simply, a bear market is a market condition where the prices of securities fall, and widespread pessimism causes negative sentiment to linger. Investors anticipate losses in a bear market, selling continues, and pessimism only grows. It can be compared to an earthquake: unpredictable, damaging – but often, or at least we hope, not particularly long-lasting.
Figures can vary, but for most investors a downturn of 20% or more in multiple broad market indexes such as the Dow Jones or the S&P 500, over at least a two-month period, is considered an entry into a bear market. This shouldn’t be confused with a correction, which is a short-term trend that lasts less than 2 months.
A bear market is triggered when investors lose faith in the markets as a whole, thereby decreasing the demand for stocks. This tends to happen when the economy enters a recession, unemployment is high and inflation is rising.
On a more positive note, over the past 200 years, the stock market has risen more than it has declined. They are hard to predict, like earthquakes, but hazardous to those who fail to prepare.
How do we know if one is coming?
Since 1929, the US stock market has experienced 25 bear markets, an average of one every 3.4 years. Unfortunately, this means that we’re overdue for one. The most recent bear market ended in March 2009 – more than six years ago. Those 25 bear markets have lasted, on average, for about 10 months.
A good way to protect your investment is to diversify among many equity asset classes, which we recommend that our clients do anyway. With ayondo Social Trading, our Top Traders are consistently active in a variety of asset classes. Followers also have the option to adjust, and therefore, reduce, their exposure to certain instruments.
Are we in a bear market?
It would seem so, or we’re at least heading that way. There was a steep decline for the MSCI World Index in early February, ending in it closing more than 20% below its recent high, pushing global stocks into a technical bear market. Investors are nervous about cheap oil prices, the threat of global recession and whether big banks will be able to withstand such powerful forces.
In late January, China’s market entered bear market territory, dragging much of Europe and Japan with it. The global sell-off on January 20th meant that France and the United Kingdom plunged into a bear market too. Germany tumbled into a bear market only a week into 2016.
On a brighter note, in the United States both the S&P and the Dow are down about 9% from their recent peaks in early November and about 6% for the year: neither is anywhere near close to bear market levels. European stocks are also currently experiencing a bear market rally, with stocks cautiously climbing as the price of crude oil attempts to stabilise.
So have we fallen into deep bear market territory? Or are the current bounces in stock prices a sign that the aging bull market will reignite? We can only wait and see.
From a short-term perspective, the rallying led by Wall Street is definitely positive. However, if one looks at the bigger picture, at banking shares, the oil rout, Brexit concerns and the China slowdown, it would seem that we haven’t seen, or weathered, the last of this storm.
As with an earthquake – there is very little to be done when it comes, but it always helps to be prepared.
The views and content expressed above are the views of the author and do not reflect the views of ayondo markets. This service is for information only and should not be interpreted as investment advice or any recommendation to enter into a financial transaction.