When the Bear Comes out of Hibernation
Bear Markets: What You Need to Know
There’s been a lot of talk recently about the stock markets moving into bear territory. What does that mean and what do you need to know?
What is a bear market?
A bear market is triggered by a market decline of 20%. Each stock market will enter bear market territory at slightly different times depending on when they reach that 20% drop.
What caused the current bear market?
This stock market volatility was influenced by the uncertainty of the COVID-19 pandemic. Looking back, previous epidemics haven’t caused significant market turmoil. That said, the severity of this virus and length of the epidemic could continue to impact what happens in the market.
Bear market ≠ economy
A market decline doesn’t necessarily mean that the economy is in trouble. That said, a bear market can occur hand in hand with an economic recession – which is defined by the economy experiencing two or more quarters of negative growth (or decline). As with the stock markets, individual economies can go into recession at different times.
With the current environment – schools being closed, employees working from home or quarantined, travel restricted – much of the economy is at a stand-still and the data will undoubtedly reflect that.
Previous bear markets
No one can predict exactly how far the stock market will drop and when it will bottom out. Nor can they say precisely how long a bear market will last.
The table below shows the biggest market corrections over the last century. It’s important to remember that the recent end to the 11-year bull market wasn’t triggered by the stocks being overvalued as with with the dotcom crash. Nor was it an indicator of systemic issues like the Global Financial Crisis.
How long does a bear market last?
The average bear market lasts less than a year.
The chart below shows the bull and bear markets in the Canadian stock market over the past 60-plus years. The bull markets (purple line) on average lasted longer (42.9 months vs. 8.6 months) and their average gain (105.8%) was higher than the average drop during the bear markets (24.7%).
How can you protect yourself from the bear?
As in real life, you probably shouldn’t run from a bear (market).
Reach out to your financial advisor who can help ensure your portfolio is diversified appropriately for your risk level, investment goals and time horizon.