Bear Market Definition and Investment Practical Guide: From Panic to Opportunity

In the cyclical fluctuations of the capital markets, the bear market definition is simple but important: when asset prices decline more than 20% from their high, the market officially enters a bear market. This logic applies not only to stocks but also to bonds, real estate, precious metals, commodities, currency exchange rates, and even cryptocurrencies.

Conversely, when stock prices rise more than 20% from their lows, it signals a bull market. Many investors prefer the optimistic atmosphere of a bull market, but the true test of investment skill often occurs during bear markets.

What Does a Bear Market Look Like? Market Performance Can Be Traced

Bear markets do not appear suddenly; they are often accompanied by identifiable market characteristics. According to historical data, the S&P 500 index has experienced 19 bear markets over the past 140 years, with an average decline of 37.3% and an average duration of about 289 days. But these are averages— the 2020 pandemic bear market lasted only one month, while others lasted several years.

Typical manifestations of a bear market include:

A significant drop in stock prices often coincides with economic recession and rising unemployment rates. Central banks usually initiate quantitative easing to stabilize the situation, but history shows that the rallies before QE are often just bear market rebounds, not a true exit from the bear.

Asset bubbles are common triggers for bear markets. When investors exhibit irrational enthusiasm, inflating asset prices to the point where no buyers remain, a stampede effect ensues, leading to more severe declines.

It is also important to note that a bear market is not the same as a market correction. A correction refers to a 10%-20% decline in stock prices, a short-term adjustment that occurs more frequently; a bear market is a long-term, systemic downturn that has a much greater impact on asset allocation and investor psychology.

How Do Bear Markets Occur? The Four Main Drivers

Loss of market confidence is the most direct trigger. When investors are pessimistic about future economic prospects, consumers reduce discretionary spending, companies cut back on hiring and expansion plans, and capital markets shrink their buy-in due to declining corporate profits. When all three factors align, stock prices often plummet in the short term.

Tightening monetary policy directly suppresses market liquidity. Measures like the Federal Reserve raising interest rates and shrinking its balance sheet inhibit corporate and consumer spending, pushing down stock markets. The 2022 example— the Fed raising rates sharply and reducing its balance sheet to combat inflation— directly triggered a bear market.

Geopolitical risks and financial crises often serve as catalysts. Bank failures, sovereign debt crises, wars—such as the Russia-Ukraine conflict driving up energy prices, or US-China trade tensions disrupting supply chains—these external shocks rapidly change market expectations.

Natural disasters, pandemics, energy crises, and other unexpected events can cause global market crashes. The COVID-19 pandemic in 2020 is a prime example.

A Brief History of the US Stock Market Bear Markets: Recognizing Market Patterns from Crises

2022 bear market: Post-pandemic global central banks engaged in aggressive QE, fueling inflation; the Russia-Ukraine war pushed up food and oil prices; the Fed was forced to raise rates sharply and reduce its balance sheet. Market confidence declined, and stocks that had surged in the previous two years, especially tech stocks, suffered the worst. The bear market continued into 2023.

2020 COVID panic: From the peak of 29,568 on the Dow on February 12 to the low of 18,213 on March 23, this was the shortest bear market in history. On March 26, the Dow closed at 22,552, rebounding 20% and exiting the bear market. Global central banks quickly implemented QE to stabilize liquidity, resolving the crisis promptly, leading to two consecutive years of super bull markets.

2008 financial crisis: This bear market started on October 9, 2007, with the Dow Jones falling from 14,164.43 to 6,544.44 on March 6, 2009, a decline of 53.4%. Low-interest policies fueled a housing bubble; banks packaged risks into financial products and resold them until rising home prices prompted market rate hikes. Investors hesitated, home prices fell, triggering a chain reaction. The stock market took years to recover, only reaching the 2007 high again in March 2013.

2000 dot-com bubble: In the late 1990s, many internet companies went public with only concepts and no real profits. Valuations became severely inflated, and a sell-off ensued. This bear market ended the longest bull run in US history and triggered a recession the following year. The September 11 attacks further caused stock market crashes.

1987 Black Monday: On October 19, the Dow plunged 22.62%. Ongoing interest rate hikes, Middle East tensions, and algorithmic trading panic caused market chaos. The government learned from the 1929 Great Depression, immediately cut rates and introduced circuit breakers. Markets recovered to previous highs after 1 year and 4 months.

1973-74 Oil Crisis: After the Fourth Middle East War, OPEC imposed an oil embargo, causing oil prices to soar from $3 to $12 per barrel (a 300% increase) within six months. This exacerbated US inflation at 8%, leading to stagflation—GDP shrank by 4.7%, while inflation hit 12.3%. The S&P 500 fell 48%, and the Dow was halved. The bear market lasted 21 months, making it one of the longest and deepest systemic crashes in modern US stock history.

How Should Investors Respond When a Bear Market Arrives?

Step 1: Reduce Portfolio Risk and Keep Cash Reserves

Maintain sufficient cash reserves during a bear market to avoid being impacted by volatility. Reduce leverage and cut back on high P/E and high-momentum stocks. These assets tend to be overhyped in bull markets and fall sharply in bear markets.

Step 2: Identify Relative Resilience and Oversold Blue Chips

Focus on sectors less affected by economic cycles, such as healthcare and niche industries, which often perform better during bear markets. Also consider oversold but fundamentally strong stocks with durable competitive advantages. Use historical P/E ranges to build positions gradually when prices are low.

These quality stocks should have enough competitive edge to sustain at least 3 years. If uncertain about individual stocks, consider broad market ETFs, which will likely rebound when the economy enters the next recovery phase.

Step 3: Use Financial Instruments to Capture Downside Opportunities

Bear markets have higher probabilities of decline, increasing the success rate of short-selling. Investors can consider derivatives like CFDs (Contracts for Difference) for shorting. CFDs allow trading on indices, forex, futures, stocks, and metals with two-way trading. Many platforms offer demo accounts for practice before trading live.

Bear Market Rebounds Are Not the Same as a Bull Market: How to Spot the Traps

Bear market rallies, known as “bear traps,” often occur. A rise of over 5% is generally considered a rebound, but this can mislead investors into thinking a bull market has begun. Unless the market shows consecutive days or months of gains, or a rise exceeding 20% from the bear market threshold, it should be viewed as a rebound.

Indicators to distinguish a rebound or reversal include:

• Over 90% of stocks trading above their 10-day moving average
• More than 50% of stocks rising
• Over 55% of stocks hitting new highs within 20 days

When these three indicators appear together, the signal for a genuine reversal is more reliable.

Conclusion: Patience and Strategy Are Key in a Bear Market

A bear market is not a disaster but an opportunity to rebalance assets. The key is to recognize its onset early, protect assets amid volatility, and leverage appropriate financial tools to find investment opportunities.

For prudent investors, the most important thing during a bear market is patience and discipline—strictly executing stop-loss and take-profit plans—to protect and grow assets through market cycles. Adjust your mindset, seize opportunities, and both long and short positions can be profitable.