We all know that bear markets are risky for investors but they still make money with designed strategies. Bear market can also be an opportunity to make money for traders. But what exactly is a bear market? Why do they happen? When is the next one expected to come? We’ll answer these questions and more in this guide on what causes a crash and how long it lasts.
What is a Bear Market?
A Bear Market is a period when the share value declines in price. The decline of a security’s price may be sudden or gradual. The market is bearish when the prices of stocks fall by 20% or more from their recent highs. During this time, investors become fearful about prospects for profit and growth. Portfolios are in danger and it gets heavy to watch the holdings fall. However, knowing that there is a light at the end of the tunnel can help.
1. The bursting of market bubbles
2. Public health crises
3. Geopolitical crises
4. Slowing economic growth or poor economic data
5.Contractionary monetary or fiscal policies
6. Recessions
How long does a Bear Market last?
Bear markets are inevitable and happen often. This is part of the economic cycle. However, they indicate a potential economic downturn. Geopolitical risks and the bursting of market bubbles are common causes as to why markets slip into a bearish phase.
It has been suggested by experts that each bear market is different and unique. This is why there is no way to say how far the market may drop or for how long it may last. But, bear markets can be beneficial. If you are an investor, then you can make money by investing in inverse ETFs or short-selling stocks during a bear market.
Bear Markets are broken down into two categories that are known as secular and cyclical. Secular bear markets are driven by forces or influences that cause the price of stocks to drop over a long period, usually years. On the other hand, cyclical bear markets generally last only for a few months and are caused by normal market volatility.
Stages of a Bear Market
The stages of a bear market can help you to understand if the bear market might end soon or if it might last for a long time. Usually, bear markets come in four stages:
Stage 1: Recognition
At this stage investors have a positive sentiment and prices are high. Investors will usually choose to ignore the initial onset of a bear market and mistake it for ordinary day-to-day fluctuations. A few investors realize that it is a bear market towards the end of this stage and start selling their stocks.
Stage 2: Panic
There is panic in the markets and investors tend to panic buy or sell. The volumes in trading drop significantly and economic indicators point to a worsening economy. Investor sentiments drop significantly.
Stage 3: Stabilization
This is when the panic begins to fade away and investors start to make sense of the reason for the price drop. This stage is usually unstable and turbulent. This is the stage that lasts the longest. New speculators enter this stage and there may be rallies that tend to reverse.
Stage 4: Anticipation
At this stage, the prices seem to level off and much good news regarding the stocks starts attracting investors into purchasing equity.
History of Bear Market in India
1997-98
The bear market in 1997 was triggered by the Asian financial crisis and preceded by the Russian debt default. India had a balance sheet that was good and was not part of the crisis. However, the crash in the Asian markets also impacted the Indian markets.
This was followed by the crash in the Russian markets when Russia devalued the Ruble and defaulted on domestic debts and declared a moratorium on payment to foreign creditors.
2000-01
The bursting of the tech bubble added to the terrorist attacks in the US. India also witnessed some collateral damage in the software services sector. However, this time the bear market was more US-centric.
2008-09
This happened due to the global financial crisis. India’s stock market was among the worst performers globally. However, Indian banks were unaffected.
The prices of stocks suffered deep cuts and more than 99% of the stocks yielded negative returns from January to November 2008. The BSE Smallcap Index ended the cycle with a net loss of 41 percent from its value at the beginning and 80 percent from the January 2008 value.
The BSE Midcap Index lost about 36 percent from its value at the beginning and 75 percent from January 2008. Moreover, Sensex lost 18 percent from its beginning value and 60 percent from Its January 2008 value.
2020
The bear market in 2020 was due to the effects of the COVID-19 pandemic. The markets dropped by 34.22 percent. The outbreak of COVID-19 resulted in nationwide lockdowns around the world. The worldwide lockdowns led to a huge market crash in the global as well as Indian markets.
Once it was declared a pandemic by the World Health Organization, the Sensex dropped from 42,271 points to 28,288 points within a week. Moreover, it coincided with the Yes Bank crisis, which made the strong BFSI sector lose crucial points.
Conclusion
A Bear market is a situation where the price of an asset (stocks, bonds etc.) declines for a prolonged period. A bear market can last for months or even years. The most common cause for a Bear Market is economic factors such as recessions and wars.
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