By Bob Barber, CWS®, CKA®
Definition: A bear market is when securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. The average bear market can last around a year.
The average “bull market”, where prices are increasing, last over 4 years.
- Bear markets create buying opportunities. Many good companies are “on sale” during bear markets, creating buying opportunities you would not normally have in an overvalued bull market.
- Bear markets create balance. It’s healthy and keeps values from overextending. If we never had bear markets, values would never be in check. A bear market brings balance back into markets.
- Bear markets remove inexperienced day traders. Day traders get a hard lesson about gambling in stocks when bear markets occur, and many quit after they have run out of money. This helps create a less volatile market, which usually for a few years until the markets reaches a new high. At which point, day traders usually return.
- Bear markets prune out weak companies. This can result in a much healthier market with stronger companies.
- Bear markets push away short term investors. Investing involves risk. It is not for those that cannot handle short-term volatility for a few months, or even 1-2 years. Investing is meant to be for the long-term measured in many years, not months.
- Bear markets allow companies to buy back their own stock at bargain basement prices and take control again and possibly even consolidate with other companies. Many companies buy back their stock during a bear market or buy a competitor which creates synergy and a stronger company.
The 2 main things causing the present bear market are…
- Inflation caused by supply side issues lingering from the pandemic, the Ukraine/Russia war, and high oil prices.
- Artificially low Interest rates returning to normal. Higher rates, given time, should cause price declines in things like real estate to offset higher rates and slow down inflation.