If you take a walk around the stock exchange square in Frankfurt, you will find two sculptures: a bear and a bull. But what do these two animals have to do with the stock market and what do they say? In this article, you will find out what is meant by "bear market", how these phases can arise and how investors react to them.
Bear market definition
The term bear market is used when the stock market experiences a Decline in share prices comes. This goes hand in hand with a rather pessimistic mood among investors accompanied. The bear is pointing slightly downwards, symbolizing the downward movement or price decline.
The Bull stands for the opposite. Its horns move upwards, which creates a Upward trend and rising prices on the stock market and stands for investor optimism. In a bull market there is a High demandThis drives up prices and share prices.
- A bear market is said to exist when a broad market index falls by at least 20 percent over a period of at least two months
- Large quantities of securities are sold during such periods
The mood on the market changes during such phases. There is a Great uncertainty and there is often a fear that prices could deteriorate further. It is possible that only certain sectors, such as commodities, are affected. Often the entire market is also involved in the downturn.
How can you recognize a bear market?
It is impossible to predict a bear market or give more precise information about its duration. Nevertheless, there are some signs that help to recognize a bear market:
- Declining economyIf the economy is in decline, this indicates that the stock market could soon collapse. It helps to take a look at important Economic indicatorssuch as the Purchasing Managers Index from America or the IFO Business Climate Index from Germany. Such data helps to assess the expectations of companies and their future actions.
- Interest rates riseWhen interest rates are raised, companies and consumers cut back on spending, which can cause earnings and share prices to fall.
- Changed moodWhen investor sentiment changes, this can indicate a coming bear market. Investor sentiment can be ascertained and read in corresponding surveys, for example.
- Implied volatilityWhen the implied volatility of the overall market rises, this indicates that a bear market could occur. This measure indicates the extent to which market prices will fluctuate around a predetermined mean value.
- Entire market affectedWhen changes occur in all sectors, this can indicate a bear market. The entire market is often affected, not just individual sectors.
How does a bear market develop?
Major downturns and corrections are comparatively rare. In such cases, we speak of a bear market. These are smaller declines, so-called Pullbacks, excluded. These can occur several times a day.
- Specific examples of past bear markets include the financial crisis in 2008 and the Covid pandemic
- This shows how diverse the causes for the emergence of such markets can be
Unrest, social change, wars, pandemics, natural disasters, political uncertainties or other events can trigger a bear market. However, there is often no specific origin for such a development.
How do investors behave in a bear market?
There are different strategies that investors can use during a bear market. In some cases there is a Reallocation to crisis-resistant sectorsthat are considered defensive. These include sectors such as basic foodstuffs or pharmaceutical shares.
However, reallocations can involve high costs. It is often worth sticking to your strategy and riding out crises on the stock market. Bear markets also offer Opportunities for a favorable purchase.
Professional investors often use the Shorting and speculate with the help of Short sales on falling prices. This strategy is associated with high risks, which is why knowledge and experience are necessary.
Investors with a high need for security invest in so-called Safe Haven facilities. These include, for example, government bonds with a correspondingly high rating. Gold is also considered a crisis-proof investment.
It is generally advisable for investors not to panic when a bear market occurs. After a low, the stock market also reaches a high again. Diversified portfolios are often used to balance out fluctuations.
Conclusion: What does bear market mean?
Der Begriff Bear market describes a Downturn on the bad. Such a downturn creates uncertainty among investors, a Falling demand and a pessimistic mood. The downward stance of a bear symbolizes this phase of the stock market.
The opposite of such phases is characterized by the Bulls whose upward-pointing horns symbolize the rising rates stand. There is optimism and high demand on the stock market.
Even if bear markets cannot be predicted, there are various aspects that can indicate a change and the first warning signs of a downturn. These include Changed moodan increased Volatility, the Participation of the broad market oder eine Declining economy.
The Ursachen for a bear market are versatile. Political uncertainty, disasters, wars and unrest can lead to an economic downturn. One concrete example is the downturn following the coronavirus pandemic.