bear market

DEFINITION: The phrase “bear market” refers to economic conditions in which the stock market experiences an extended price slump.

To qualify as a bear market, conventionally stocks must decline by 20 percent or more from their recent peak. Such market conditions are also accompanied by widespread pessimism and aversion to further risk-taking on the part of investors.

Bear markets are frequently linked with downturns in a broad market or an index, such as the S&P 500. However, specific securities or commodities can also qualify as being in a bear market if they undergo a decline of 20 percent or more for a considerable period of time, usually spanning at least two months.

Bear markets usually coincide with contractions in the real economy, such as recessions. They stand in opposition to the upward trajectories observed in bull markets.

ETYMOLOGY: The phrase “bear market” appears to have originated in the eighteenth century from the practice of frontier bearskin traders, who would require payment from customers for their skins before they had bought the skins from fur trappers.

If prices for skins were generally falling, then the price that traders paid to trappers would be lower than the price they received from customers. In other words, bearskin traders would make a profit in a declining market for bearskins—hence, the association between bears and falling prices.

The association became so well known that a proverb came into being at the time, which spoke of “selling the bearskin before catching the bear.”

The English noun “bear” derives, via Middle English bere, from Old English bera. The latter noun is akin to the Old English adjective brūn, meaning “brown.”

The English noun “market” derives, via Middle English and Old North French, from the Latin noun mercātus, mercātūs, meaning “trade,” “traffic,” or “business,” as well as the place where the trade or business takes place, that is, a “marketplace.”

Mercātus, in turn, is linked to the deponent verb mercor, mercari, meaning “to traffic in” and “to trade,” as well as the noun merx, mercis, meaning “goods” or “merchandise.”

USAGE: A stock’s value most often reflects a company’s anticipated future cash flows and profits. When a company’s growth expectations are unmet, and its prospects diminish, then stock prices have a tendency to fall.

In such situations psychological factors, such as herd mentality, fear-driven actions, and a collective desire to mitigate potential losses, may result in extended periods of lower asset values.

By convention, a bear market occurs when stocks decline an average of at least 20 percent from their peak. This is an admittedly subjective metric, but it is in line with several other similar measures, such as the notion of “market correction,” which is defined as a 10-percent drop in prices.

An even more subjective characterization of a bear market is a phenomenon of mass psychology, namely, the occurrence of a widespread change in the mentality of investors leading them to prioritize caution over risk-taking.

In this type of bear market—which may last for months or even years—investors will tend to avoid more-speculative investments in favor of less-exciting but dependable ones.

Bear markets can arise for many reasons. For example, a bear market may result from an economy that is weakening, slowing, or stagnant.

Potential triggers of a bear market may vary widely from such occurrences as pandemics, wars, and political upheavals to the bursting of market bubbles and major technological shifts, such as the rise of the online economy. Moreover, a bear market may also potentially be caused by government interference in the economy.

All of the foregoing phenomena may lead to unemployment, loss of income, decline in productivity, and reduced profits.