What Is a Bear Market?

This guide explains the bear market meaning in plain terms, covers typical causes and characteristics and compares bear and bull market conditions. The aim is educational rather than predictive. No one can reliably forecast when markets will turn, but understanding the landscape helps you interpret what you read and hear.

Bear market definition: What does it mean?

A bear market describes a sustained period during which asset prices decline significantly from recent highs. While the phrase can apply to individual securities, sectors or commodities, it most commonly refers to broad equity indices such as the FTSE 100, S&P 500 or MSCI World Index.

The defining feature is not merely a bad week or a volatile month. A bear market represents a prolonged downturn where pessimism takes hold and selling pressure persists across many market participants.

The 20% threshold explained

The most widely accepted definition sets the threshold at a 20% decline from a recent peak. When a major index falls by 20% or more from its highest point, commentators typically declare a bear market has begun.

This threshold was established by Alan Shaw, a legendary founder of technical analysis and managing director at Smith Barney, whose simple framework for describing market declines struck a chord in the public imagination.

Nevertheless, the threshold is a convention rather than a scientific boundary. There is nothing magical about 20% specifically. A 19.5% decline feels much the same to an investor’s portfolio as a 20.5% decline. However, having a standard definition allows analysts, journalists and investors to communicate using shared terminology.

Some analysts use additional criteria, such as requiring the decline to persist for at least two months. Others look for confirmation across multiple indices or sectors before declaring a bear market. These variations mean you may occasionally encounter disagreement about whether a particular downturn officially qualifies.

Why is it called a bear market?

The origin of the term is debated, but the most commonly cited explanation relates to how bears attack. A bear swipes downward with its paws, which mirrors the downward movement of falling prices.

Another theory connects to an old proverb about selling bearskins before catching the bear. Speculators who sold shares they did not yet own, hoping to buy them back cheaper later, were called bear-skin jobbers or simply bears. When their bets succeeded and prices fell, the market moved in their favour.

The bull, by contrast, attacks with an upward thrust of its horns. This imagery links neatly to rising prices, giving us the bull market as the opposite of its bearish counterpart.

Key characteristics of a bear market

Beyond the headline decline figure, bear markets share certain features that distinguish them from ordinary market dips or corrections.

Typical duration and phases

Bear markets vary considerably in length and severity. Some last only a few months; others persist for years. The decline rarely happens in a straight line. Instead, prices often fall sharply, recover partially, then decline again, creating a jagged pattern that can mislead observers into thinking the worst has passed.

Many analysts describe bear markets in phases. The initial phase often features sharp selling as investors react to negative news. A second phase may involve attempts to find a bottom, with buying interest emerging at lower prices. Later phases can see capitulation, where even long-term holders sell, followed eventually by stabilisation and the early stages of recovery.

These phases are easier to identify in hindsight than in real time. During a bear market, uncertainty dominates and predictions about which phase the market has reached are frequently wrong.

Common causes of bear markets

Bear markets do not emerge from nowhere. They typically result from one or more underlying factors that undermine confidence in future corporate earnings, economic growth or asset valuations.

Economic recessions represent a common trigger. When economic output contracts, corporate profits generally fall and investors adjust their expectations downward. Rising unemployment, declining consumer spending and reduced business investment all contribute to this dynamic.

External shocks can also spark bear markets. Geopolitical events, pandemics, energy crises or financial system disruptions may trigger rapid selling as investors reassess risk.

Valuation concerns sometimes play a role. If prices have risen far beyond what fundamentals support, a correction becomes increasingly likely. When enough investors decide prices have climbed too high, selling can become self-reinforcing.

Monetary policy changes can tip markets into decline. Rising interest rates increase borrowing costs for companies and consumers while making bonds more attractive relative to equities. Central bank actions often influence market direction significantly.

Bear market vs bull market: Understanding the difference

Understanding the difference between bear and bull market conditions helps put market movements in context. These two states represent the primary phases of market cycles, though reality is messier than simple labels suggest.

How bull markets are defined

What is a bull market? Like its bearish counterpart, a bull market has a conventional definition: a sustained period during which prices rise by 20% or more from a recent low. Bull markets are characterised by optimism, rising corporate earnings and increasing investor confidence.

During bull markets, economic conditions are typically favourable. Employment grows, consumer spending increases and businesses invest in expansion. This positive backdrop supports higher corporate profits, which in turn justifies higher share prices.

Bull markets can last considerably longer than bear markets. The confidence that drives prices higher tends to build gradually, while the fear that triggers declines often strikes more suddenly.

Comparing market cycles

Transitions between these states are rarely clear at the time. What appears to be the start of a bull market may turn out to be a temporary rally within a longer bear market. Similarly, a sharp decline during a bull market may prove to be just a correction rather than the beginning of something worse.

This uncertainty is fundamental to investing. Markets are forward-looking, and participants constantly reassess their views based on new information. Declarations about whether we are in a bull or bear market are inherently backward-looking, relying on price data that has already occurred.

Historical examples of bear markets

Looking at past bear markets provides context, though it is essential to remember that past performance does not indicate future results. Each bear market has unique characteristics shaped by the specific circumstances that caused it.

The Wall Street Crash of 1929 and subsequent decline remains the most severe bear market in modern history. US equities fell approximately 89% from their peak before reaching a bottom in 1932. Recovery took many years, and the economic damage contributed to a global depression. The index did not reach the 1929 high again until 23 November 1954.

More recently, the financial crisis of 2007-2009 saw major indices decline; the S&P 500 fell 57% from its October 2007 peak before bottoming on 9 March 2009. Banking sector problems, housing market collapses and credit market freezes combined to create severe economic disruption.

The rapid decline in early 2020 associated with the global pandemic showed how quickly bear market conditions can emerge. Major indices fell nearly 34% in a matter of weeks, though this particular bear market proved unusually short, lasting only five weeks before prices recovered.

The early 2000s saw a prolonged downturn following the collapse of the technology bubble. Many indices took years to recover their previous peaks, and investors in certain sectors experienced even longer wait times.

These examples illustrate the range of possibilities. Some bear markets are sharp but brief. Others are extended and painful. Some coincide with obvious economic crises; others emerge when conditions seem relatively benign. The variety suggests caution about assuming any particular pattern will repeat.

How bear markets may affect investors

Market downturns have practical implications for anyone holding investments. Understanding these effects helps maintain perspective during difficult periods.

Potential risks to be aware of

Portfolio values decline during bear markets, sometimes substantially. An investor who needs to withdraw funds during such a period may be forced to sell at depressed prices, crystallising losses that might otherwise have been recovered over time.

Leveraged positions carry heightened risk during market declines. Products such as spread bets and contracts for difference (CFDs) amplify both gains and losses. During bear markets, leveraged long positions can result in losses exceeding the initial investment.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Approximately 80% of retail investor accounts lose money when trading CFDs, according to Financial Conduct Authority (FCA) data. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Income from investments may also fall. Companies under financial pressure may reduce or suspend dividend payments. Bond issuers facing difficulties may default on interest payments.

Psychological effects should not be underestimated. Watching portfolio values decline can be stressful and may lead to poor decision-making. Selling in panic at market lows locks in losses and removes the possibility of participating in any subsequent recovery.

Bear markets also present opportunities for those with long time horizons and available capital. Lower prices mean higher potential future returns, all else being equal, though prices can fall further and returns are not guaranteed. However, timing the market bottom is extremely difficult and attempting to do so often backfires.

Key takeaways

• A bear market is conventionally defined as a decline of 20% or more from a recent peak in a broad market index.

• The term likely derives from the downward swiping motion of a bear’s attack, contrasting with a bull’s upward thrust.

• Bear markets are typically caused by economic recessions, external shocks, valuation concerns or monetary policy changes.

• Bull markets represent the opposite condition: sustained price increases of 20% or more from a low point.

• Historical bear markets have varied significantly in duration and severity.

• Bear markets carry risks including portfolio value declines, challenges for those who need to access funds and psychological stress.

• Past performance does not guarantee future results, and predicting market turning points with reliability is not possible.