A bear market is one in which prices are either falling or expected to fall very shortly. So, investors who are called ‘bearish‘ are those eternal pessimists of the stock market; they expect markets to drop, and the economy to contract (become smaller). Bear in mind (sorry!) that both of these terms tend to describe long-term market trends. Market volatility is quite natural over the short-term, but bearish investors, and bear markets, both describe the expectation of a long-term trend of market contraction.
Bear markets, and the bearish investors which contribute to the fall, tend to emerge when the economy is perceived to be weak. When is an economy adjudged to be unhealthy? There are many different answers, but most commonly this is when unemployment rates are high, or when inflation is out of control. Indeed, one of the key metric for an economy’s health (or lack thereof) is actually how bearish – pessimistic – most investors are in the first place! If investors are bearish, and therefore expect that the downward spiral in stocks will continue, they’re more likely to sell more stocks in fear of losing money. If more sellers are interested in selling shares at a certain price than there are buyers willing to part with their cash in exchange for those shares, then that price will of course fall, as supply is in excess of demand in that case.
A bear market’s natural opposite is a bull market. Bullish investors hold completely different viewpoint to bearish types. As you may guess, these folks have much more positive outlooks on the future prospects of a given market. Why do we have these terms? Well, understanding an investor’s predictions about the future is important, as it gives an important indication of their behaviour. It is, after all, human behaviour which drives the market in the first place! Generally, if a reliable poll were to conclude that most investors are bearish about the future, they are likely to sell what they have in anticipation of a downfall, which actually helps cause that downfall in the first place. By contrast, if bullish optimism is the feeling en mode, people are likely to want to spend, which may preclude a period of economic growth.
Examples Of A Bear Market
History is littered with pertinent examples of bear markets. Aside from the Great Depression there have also been bear markets during the Vietnam War, the oil crisis, and 1970s Middle East conflicts. The most recent bear market has been the financial crisis of 2008, which caused a recession and the closure of several investment banks.
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