Things About A Bearish Market
There is no way to determine when exactly a bear market will end, but, this doesn't mean you can't protect your investments. While it's natural to feel concerned when you see your position in red, there are a few strategies you can take advantage of to survive a bearish market.
What Is a Bearish Market?
When a stock index, for example, S&P 500, DJIA, or Nasdaq, sinks over 20% from its recent high, we enter a bear market. It gets its name from how a bear attacks its prey by swiping its paws down to express the downturn trend of the stock price. It should be noted that the 20% drop is merely a hypothetical measure; as of yet, there is no official definition of a bear market. If an index loses approximately 10%, or has been declining in the short-term (around 1-3 months), this is called a correction instead of a bear market.
How Long Will a Bearish Market Last?
Since there is no way to tell exactly when a bear market will end, we can look at previous market patterns to learn more about how bearish markets have behaved in the past.
Do you know how many bearish and bullish markets have US market has seen in the past 70 years?
Source: RBC GAM, Bloomberg. As of March 24, 2020. S&P 500 TR (USD).
In the past 70 years, we have witnessed 12 bull markets and 11 bear markets. We can tell a bear market lasts for different periods—one can last as long as 2.8 years, as it did in 1930, or can be as short as 3 months, as in 1988. A bear market usually follows a bull market. History tells us the upward return in a bull tends to be higher than the downward loss in a bear. Think collectively and prospectively.
A Sign of Recovery
The economy follows a cycle. Economy growth is closely related to inflation (interest rate). When the interest rate is up and companies pay higher borrowing costs to expand their business, economic growth slows down. When the interest rate is back to normal, consumer spending and investment increase, and the economy starts to boost.
What Can Be the Possible Causes of A Bear Market?
There are too many factors to consider when we want to explain the reason for the bearish downturn. A few key points include:
- Economic Slowdown: Feds increased the interest rate by 0.75% points on 6/15/2022 with a strong mind to fight against high inflation. Interest rate increases and high inflation hurt stock market confidence.
- Pandemic Illness: Covid-19 outbreaks across the globe harm the economy by restraining consumer demand and increasing the healthcare system burden.
- Geographic Wars: The Russian-Ukraine war in March caused oil prices to soar to a recent high.
- Negative Sentiment: When investors, usually retail, see stock prices falling, they tend to worry and are more inclined to sell off their positions to stop losses. This will, in turn, push the market to fall further.
Bearish Market VS Recession
While a bearish market is defined by a steep dip in the stock market, a recession is used to describe when the economy of a country reveals a slowdown of performance in terms of their GDP over two consecutive quarters. An economic slowdown is broader than a stock market slowdown. Not every bear market is accompanied by a recession, but typically they go hand in hand.
Below Are What Strategies We Think You Need to Know.
1. Do nothing
If you aren't interested in taking large risks with your investments, it may be best for you to wait out the bear market. Likely, your investments may recover with the bullish market.
2. Dollar-cost-averaging
This is a strategy commonly used by investors who buy certain securities at a fixed amount over consistent periods. For example, instead of buying a certain stock at $800 at one time, split the investment into 8, investing $100 each month. This can help to reduce the desire to time the mark lows. This strategy is commonly used by long-term investors. By engaging this strategy, investors may need to give up higher returns in a bullish market.
3. Diversified investing
The golden rule of investing: don't put all your eggs into one basket. When the market isn't performing well, this is true tenfold. Diversifying your portfolio can potentially reduce loss, especially in a bearish market. With your investments spread out through various products and industries, you're less likely to feel as heavy an impact in such situations.
4. Short
When an investor sells stocks they don't own by borrowing from security lenders, this is called short selling. Short sellers believe a stock price will fall or desire to hedge against potential downward price volatility in their securities. If a stock price drops, short sellers can buy at a lower price and turn a profit. If the price rises, they incur a loss. This loss can be unlimited.
5. Inverse ETF
Funds that use financial derivatives to reach returns opposite of a benchmark index are inverse ETFs. For example, if an index is down 5% today, the profit of its inverse ETF can be 5%. If the index is up 5%, the loss will be 5%. This is usually used for short-term speculation or hedging in a vitality market. If you are holding a long position, inverse ETFs may not be the right investment for you.
The Bottom Line
A bearish market can be cause for concern for many investors. But, with careful strategy and planning, you have the potential to make a falling market work in your favor.
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