THE BEAR MARKET
To the average investor, a bear market can be as terrifying as a seven-foot tall grizzly bear. Bear markets can lay bare the vulnerabilities in your investment portfolio and exacerbate them. This sustained decline in the Stock market is also often the bearer of bad news: an upcoming recession. Even if these markets are usually bad news bears, downward trends in the stock market are a natural part of the ebb and flow of the financial markets. However, it is easy to get caught up in the panic and lose your bearings.
WHAT IS THE BEAR MARKET?
A bear market refers to a market state characterized by falling securities prices and pessimistic investor sentiment. A market space is considered to be experiencing a bear run if the prices of securities fall 20% or more from their previous high. During a bear market, investors are not confident that the market will soon experience an upturn, and so many will sell off their stocks to avoid incurring a loss while the price drops. As more investors sell, prices drop even further, initiating a vicious selling cycle which feeds on itself and drives prices down even more.
WHAT CAUSES A BEAR MARKET?
A bear market happens when an inciting incident, whatever it may be, undermines investor confidence, causing them to sell their shares, which lowers stock market prices. The momentum of a bear market can often perpetuate itself. As prices drop, investors lose confidence, which prompts them to sell. This further drives the stock market’s decline
SOME MAJOR BEAR MARKET OUTBREAK
2000 Dotcom Crash
The first bear market of the millennium followed an unprecedented boom in the IT sector. During the dotcom boom, many emerging technology companies, largely funded by venture capital, began to dominate the stock market, with shares of companies like MicroStrategy rising in price from around $7 to over $300 over the course of a single year. This was to be the status quo in the IT sector until late 1999 when mounting fears over the “Y2K” bug began to erode investor confidence. While concerns over this glitch turned out to be unfounded, it was followed shortly by an increase in interest rates announced in February by Alan Greenspan. It was unclear for investors how well IT companies would be able to cope with this increase. A recession in Japan on March 13, 2000 triggered a mass selloff of stocks in the US that disproportionately affected the IT sector. On March 20 of that year, Barron’s magazine published an article predicting the imminent bankruptcy of IT companies. That same day, MicroStrategy announced that share prices fell from around $333 to $140, a 62% drop over a single day. By the end of March, increased interest rates led to an inverted yield curve, and on April 3 many of the largest IT corporations, such as Microsoft, began running into legal trouble. Microsoft in particular was ruled to have committed monopolization and tying practices. By November 9, most IT stocks had lost 75% of their value, and by the end of 2002, over $5 trillion in value had been erased. The timeline of this bear run shows the degree to which investor psychology can affect the market.
The 2008 Subprime Lending (Mortgage Crisis) Crash
The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in US home prices after the collapse of a housing bubble, leading to mortgage delinquencies, foreclosures, and the devaluation of housing-related securities. Declines in residential investment preceded the Great Recession and were followed by reductions in household spending and then business investment. Spending reductions were more significant in areas with a combination of high household debt and larger housing price declines.
The housing bubble preceding the crisis was financed with mortgage-backed securities (MBSes) and collateralized debt obligation(CDOs), which initially offered higher interest rates (i.e. better returns) than government securities, along with attractive risk ratings from rating agencies. While elements of the crisis first became more visible during 2007, several major financial institutions collapsed in September 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession.
There were many causes of the crisis, with commentators assigning different levels of blame to financial institutions, regulators, credit agencies, government housing policies, and consumers, among others. Two proximate causes were the rise in subprime-lending and the increase in housing speculation. The percentage of lower-quality subprime-mortgages originated during a given year rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S. A high percentage of these subprime mortgages, over 90% in 2006 for example, had an interest rate that increased over time. Housing speculation also increased, with the share of mortgage originations to investors (i.e. those owning homes other than primary residences) rising significantly from around 20% in 2000 to around 35% in 2006–2007. Investors, even those with prime credit ratings, were much more likely to default than non-investors when prices fell. These changes were part of a broader trend of lowered lending standards and higher-risk mortgage products, which contributed to U.S. households becoming increasingly indebted. The ratio of household debt to disposable personal income rose from 77% in 1990 to 127% by the end of 2007.
COVID-19 2020 Market Crash
On 20 February 2020, stock markets across the world suddenly crashed after growing instability due to the COVID-19 Pandemic. It ended on 7 April 2020.
Beginning on 13 May 2019, the yield curve on U. S. Treasury securities inverted, and remained so until 11 October 2019, when it reverted to normal. Through 2019, while some economists (including Campbell Harvey and former New York Federal Reserve) argued that a recession in the following year was likely, other economists (including the managing director of Wells Fargo Securities Michael Schumacher and San Francisco Federal Reserve President Mary C. Daly) argued that inverted yield curves may no longer be a reliable recession predictor. The yield curve on U.S. Treasuries would not invert again until 30 January 2020 when the World Health Organization declared the COVID-19 outbreak to be a Public Health Emergency of International Concern, four weeks after local health commission officials in Wuhan, China announced the first 27 COVID-19 cases as a viral pnuemonia strain outbreak on 1 January.
The curve did not return to normal until 3 March when the Federal Open Market Committee (FOMC) lowered the federal funds rate target by 50 basis points. In noting decisions by the FOMC to cut the federal funds rate by 25 basis points three times between 31 July and 30 October 2019, on 25 February 2020, former U.S. Under Secretary of the Treasury for International Affairs Nathan Sheets suggested that the attention of the Federal Reserve to the inversion of the yield curve in the U.S. Treasuries market when setting monetary policy may be having the perverse effect of making inverted yield curves less predictive of recessions.
KEY TRAITS OF A BEAR MARKET
However, bear markets are often triggered by an economic downturn — a contraction phase in the business cycle. Negative news or events can also cause stocks to change course. The main characteristics of a bear market include:
Investors turn pessimistic:
They decide to sell current investments or stop buying more. This increases the supply of available shares, depressing prices. Investors also usually move money toward steadier assets like Treasury bills and investment-grade bonds.
Stock/Asset values decline:
Stock and crypto asset prices dip below their company’s book value. Companies also lose money because consumers are buying less. This can lead to rising unemployment as companies freeze hiring and start laying people off as they slow production.
Investor sentiment turns negative:
The consensus is that the market’s stopped growing and won’t appreciate anytime soon. Investors move money to safer and steadier assets, like Treasury bills and investment-grade bonds.
Companies make less money:
Consumers are buying less, and investors have lost confidence. Corporate earnings and profits fall or stagnate. This leads to firms laying people off, cutting production, and curbing research and development.
The economic malaise spreads:
Money becomes more tight, leading to the risk of deflation. Markets, production, and spending are moribund.
A turnaround occurs:
Conditions bottom out. Lower interest rates stimulate spending and borrowing again. As activity and confidence return, stocks rebound and the market begins a bull run and a period of economic growth.
HOW LONG DO BEAR MARKETS LAST?
Bear markets can last for any length of time, though the average bear market lasts 9.6 months, compared to the average bull market, which lasts 3.8 years. Investors distinguish between “cyclical” and “secular” bear markets, which differ in their time frame. Cyclical bears tend to be short-term, lasting a few months. Bears that are “secular” can endure from five to 25 years. Secular bears aren’t one long slide downward, either: During “bear market rallies,” for instance, stock prices rise for a time before plunging again, to new lows. Because the low point can only be figured out retroactively, after the market’s definitely on the rebound, there’s always a lag before you can declare a bear market definitely over. (Bull markets have the same issue.) While recessions and bear markets often go hand-in-hand, recessions end once the economy starts bouncing back while bear markets end once the market has increased 20% above its lowest point. This means that a bear market will usually, by definition, exceed the actual recessionary period that caused the bear market.
4 WAYS TO INVEST DURING A BEAR MARKET
Bear markets are bad news to most investors since it’s more difficult to get a return on your investments. Theoretically, you could short-sell stocks to capture the market’s downward trend, but that adds a large amount of risk to your portfolio. During a bear market, goals tend to shift from making money to retaining the money you’ve already put in the market, which will often take the form of a waiting game. “It’s not a loss until you sell” is especially true in a bear market, but that’s often a painful truth. While bear markets generally have a shorter lifespan than bull markets, the average bear market lasts 9.6 months, which isn’t an amount of time to shrug at. Here are a few other time-tested ways to weather a bear market:
- Dollar-Cost Average Selling: If you want or need to liquidate your stocks, it may be tempting to do it all at once. However, it may be worth your time to consider dollar-cost averaging instead. Usually applied to buying, dollar-cost averaging typically has you investing a set amount of money into a certain stock over a period of time instead of buying all at once. The idea is that spreading out your investments over a period of time will smooth out momentary spikes in any direction, meaning your cost basis will more closely follow the overall market trend.
- Stick to the staples: While some companies might reign in production during an economic downturn, there are some companies that produce goods and services that people need, regardless of the current economic conditions. These industries — such as the food or utility industries — often hold their value if they aren’t increasing in value.
- Try Value investing: Bear markets are good for bargain-hunting. Fundamentally sound companies may be temporarily depressed, their shares slashed by the bear’s claws. As stock prices continue to fall, they can fall below the actual valuation, the book value, of the company. An investment strategy that focuses on these bargain stocks is known as value investing. Once the market returns to its original point and these undervalued stocks more accurately reflect their company’s book value, you’ll be able to capture that increase.
- Don’t get carried away: It can be easy to end up with overly risky investments when you’re in the middle of a bear market, looking under every rock for investments with big payoffs — you hope. Pay close attention to risk, and make sure you understand what you are investing in.
THE BOTTOM LINE
Hardly anyone is happy when the bears show up on Wall Street, but they are an inescapable fact of the financial landscape. Although they can cause pain, they can also induce a necessary cooling-off period for the stock market. And they help distinguish truly valuable investments from those that were overly inflated when the bulls were in charge.
Significant Cryptocurrency Bear Markets coming up next…..