Bulls, Bears And Pigs (Part 2) 

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Bear Markets Explained

 

There’s an old adage on Wall Street that “Bulls make money, bears make money, pigs get slaughtered”. In this second part of our three-part series we’ll answer the question “What is a bear market?”. Bull markets are explained here.

 

 

What is a bear market?

A bear market is a period where stock prices fall by at least 20%, usually over a period of many months.

 

Why is it called a “bear” market?

The terms “bull market” and “bear market” are often thought to have come from the way those animals attack their foes: A bull thrusts its horns upward into the air while a bear swipes downward with its paws.

 

How long do bear markets last?

Bear markets are usually much shorter than bull markets. Over the last 100 years the average bear market has only lasted about 15 months.

 

How much does a bear market go down?

To be called a bear market, the decline needs to be at least 20%, but it can often be much more. Our most recent bear market between October 2007 and March 2009 saw the market decline 54%. The average bear market decline is around 30%.

 

What is a “correction”?

If a market decline is only in the 10-15% range it isn’t big enough to be called a bear market. Instead, it is called a temporary “correction” within an ongoing bull market.

 

What does a bear market look like?

Bear markets often begin when the economy is entering a recession or when the Federal Reserve is raising interest rates to combat inflation. During the bear market, unemployment is often high, corporate profits are declining, and consumers are negative and very cautious about their spending. As stock prices fall, it reinforces the negative sentiment and the national mood becomes very pessimistic. Remember the gloom that pervaded the country during the financial crisis in 2008? That was a classic bear market/recession scenario.

 

What causes a bear market?

Bear markets are usually caused by declining economic fundamentals (e.g. a recession that results in lower corporate profits) or a major political event (e.g. a war or an oil crisis/embargo).

 

How do I know when the next bear market is approaching?

There is no way to precisely predict when the next bear market will begin. At Momentum we continually monitor the market and listen to what it is telling us each week. If all our selected investments are trending down, that’s a good indication a bear market is getting underway. During those times, we move to the safety of money market funds and wait for the decline to run its course.

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Next Time: How To Avoid Getting Slaughtered.

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