Understanding the Bear Market in One Article: From Historical Cases to Coping Strategies

What Exactly Is a Bear Market?

When asset prices fall more than 20% from their highs, the investment community starts calling it a “bear market.” This definition seems simple, but it reflects a deeper shift in market sentiment — a comprehensive reversal from optimism to pessimism.

Bear markets and bull markets are two sides of the same coin. A bull market is characterized by gains exceeding 20%, while a bear market is the opposite. Interestingly, this definition applies not only to stocks but also to bonds, real estate, commodities, cryptocurrencies, and other asset classes, all following the same pattern.

It’s important to note that a bear market does not equal an economic recession. A negative Consumer Price Index (CPI) indicates deflation, which points to deeper economic issues — the two are entirely different concepts. Additionally, a “market correction” (a decline of 10%-20%) is not considered a bear market; it’s just a short-term adjustment. A bear market signifies a long-term systemic downturn.

When Will a Bear Market Occur? Look for These Signals

Significant drop in stock prices from highs

The U.S. Securities and Exchange Commission’s standard is: when most major indices decline 20% or more within two months, the market is officially in a bear phase. This isn’t about the performance of a single stock but the consensus of the overall market.

Bear market cycles follow patterns

Historical data shows that the S&P 500 index has experienced 19 bear markets over the past 140 years, with an average decline of 37.3% and an average duration of about 289 days. However, these are averages; actual bear markets can vary greatly in length.

The bear market triggered by the COVID-19 pandemic in 2020 lasted only one month — the shortest on record. In contrast, the bear market during the 2008 financial crisis lasted nearly three years.

Signs of economic deterioration

Bear markets are often accompanied by several economic indicators worsening simultaneously:

• Declining corporate earnings expectations
• Rising unemployment rates
• Occurrence of inflation or deflation
• Central banks implementing quantitative easing (QE) and other rescue measures

Importantly, the rise before the official start of QE by central banks is often just a bear market rebound, not a true market reversal.

Asset bubbles reaching a critical point

When asset prices completely detach from fundamentals and investors exhibit irrational enthusiasm, a bubble is brewing that can lead to a bear market. At this point, central banks may tighten liquidity to curb excessive inflation, causing the market to enter a decline cycle.

The Drivers Behind Bear Markets

Collapse of market confidence

Once market sentiment turns pessimistic, the behaviors of consumers and businesses change. People cut back on spending, companies reduce hiring and investment, and investors sell assets — all at once, causing stock prices to plummet. This creates a self-reinforcing negative feedback loop.

Bubble bursts

When assets are overhyped and no one is willing to buy, a reversal occurs. The initial wave of selling triggers a stampede effect, with many investors rushing to exit, accelerating the decline. After confidence collapses, panic dominates the market.

Geopolitical and financial risks

Major events like bank failures, sovereign debt crises, or conflicts can trigger market panic. The Russia-Ukraine war pushed energy prices higher, and the US-China trade war disrupted supply chains, all increasing market uncertainty.

Sudden shifts in monetary policy

Interest rate hikes and balance sheet reductions by the Federal Reserve directly reduce liquidity, limiting corporate and consumer spending, which puts pressure on the stock market.

External shocks

Natural disasters, pandemics, energy crises, and other black swan events can trigger global market crashes.

Historical Review: Six Major U.S. Stock Market Bear Markets

2022: Triple blow of balance sheet reduction, war, and pandemic

Post-pandemic, global central banks printed money rapidly, causing inflation to soar. In 2022, the Russia-Ukraine war further pushed up food and oil prices, intensifying inflation. The Federal Reserve was forced to raise interest rates sharply and shrink its balance sheet, with tech stocks hit hardest. Analysts expect this bear market to last until at least 2023.

2020: The shortest bear market

The COVID-19 pandemic triggered global panic. The Dow Jones Index fell from 29,568 points on February 12 to 18,213 points on March 23, but rebounded 20% within just two weeks — the fastest recovery ever. Central banks worldwide learned from 2008 and quickly implemented QE to stabilize cash flow, which led to two consecutive years of a super bull market.

2008: The abyss of the financial crisis

This was a systemic collapse. The Dow dropped from 14,164 points to 6,544 points, a decline of 53.4%. The root causes included the dot-com bubble burst in 2000 and 9/11 in 2001, which prompted the Fed to cut rates sharply, fueling a housing bubble. Banks bundled mortgage loans into financial products and sold them layer by layer until a housing market correction triggered a chain reaction. The stock market didn’t recover to its 2007 high until 2013 — a full six years later.

2000: The dot-com bubble burst

The 1990s internet boom led to numerous high-tech IPOs, most of which lacked real profits and were driven by hype. When investors started pulling out, a stampede ensued, ending the longest bull market in U.S. history. The 2001 9/11 terrorist attacks made things worse.

1987: Lessons from Black Monday

October 19, 1987, saw the Dow Jones Industrial Average plunge 22.62%, a day etched into financial history. At that time, the Fed was raising interest rates, tensions in the Middle East were high, and automated program trading triggered stop-loss orders, amplifying the sell-off.

Fortunately, the government learned from the Great Depression of 1929, quickly introducing measures like interest rate cuts and circuit breakers, which helped the market recover to its previous high within 16 months. This showed that markets had learned to self-regulate.

1973-1974: Oil crisis and stagflation

After the Fourth Middle East War, OPEC imposed an oil embargo on supporting Israel, causing oil prices to soar from $3 to $12 per barrel within six months. This crisis worsened U.S. inflation, leading to stagflation — GDP shrank by 4.7%, while inflation hit 12.3%.

U.S. stocks began declining in January 1973, with the S&P 500 falling 48% and the Dow halving in value, lasting 21 months. This was one of the deepest and longest systemic crashes in modern U.S. history. In the aftermath, the Fed’s rate hikes to curb inflation had limited effect, and economic recovery remained slow.

Survival Tips During a Bear Market

First principle: Protect your principal

During a bear market, it’s crucial to maintain sufficient cash reserves to avoid being hit by large market swings. Reduce leverage and cut back on high P/E and high-growth stocks — these tend to rise sharply in bull markets but fall even harder in bear markets.

Seek defensive assets

If you must invest, focus on assets less affected by economic cycles, such as healthcare and niche companies. Alternatively, consider high-quality stocks with strong fundamentals that are oversold, and look at their historical P/E ranges to build positions gradually at lower levels.

These quality stocks should have a durable moat and competitive advantages that can last at least three years. Otherwise, when the market recovers, companies lacking competitiveness won’t be able to regain their previous high prices. If you lack research capabilities, investing in broad market ETFs and waiting for the next recovery is also a prudent approach.

Recognize the traps of bear market rebounds

Bear market rebounds refer to short-term rallies within a downtrend. A rise of over 5% can be called a rebound, but this can mislead investors into thinking a bull market has arrived. Unless the market shows continuous upward movement for several months or rises more than 20% away from the bear market, it’s still a rebound trap.

Indicators to distinguish a rebound from a true reversal:

• 90% of stocks trading above their 10-day moving average
• More than 50% of stocks advancing
• Over 55% of stocks hitting new highs within 20 days

Final Reflection

A bear market isn’t scary; what’s frightening is making wrong decisions during one. The key is to identify the start of a bear market promptly and respond rationally.

For conservative investors, the most important thing during a bear market is patience and discipline — strictly follow stop-loss and take-profit rules to protect your hard-earned assets. Adjust your mindset, control risks, and seize opportunities to stay steady in any market environment.