What is a bear market? Definition, history and how investors cope

A bear market is a prolonged period of falling prices, accompanied by weakening confidence and, often, a slowing economy or shrinking profits. The image is usually explained by the way a bear attacks — swiping its paws downward. Like 'bull market', the term applies to any asset but is most often used for stock indices.

By the usual convention, a bear market begins when an index closes 20% or more below its previous peak. A fall of 10% to 20% is called a correction, and a very sudden collapse a crash. Crypto investors also talk about a 'crypto winter': declines of 70% or more have happened there several times.

Measured on closing prices, from the most recent peak:

Fall from peak         = (current level − peak) ÷ peak × 100
Correction: −10% to −20%   Bear market: −20% or worse
Gain needed to recover = peak ÷ current level − 1

If an index falls from a peak of 5,000 to 4,000, it is (4,000 − 5,000) ÷ 5,000 = −20% from the peak: by convention, a bear market. Getting back to 5,000 requires a rise of 1,000 ÷ 4,000 = 25%. Recent examples in the S&P 500 range from the roughly 57% slide of 2007–2009 to the drop of about a third in early 2020, which lasted barely a month.

Bear markets rarely fall in a straight line. They are punctuated by bear market rallies — sharp rebounds of 10% or more that tempt investors back in before prices roll over again. Volatility rises, correlations between assets climb and liquidity can thin out, so even diversified portfolios feel the pain.

Historically, bear markets in major indices have been shorter than bull markets, and every one in the major US indices has eventually been followed by a recovery — although for individual stocks, sectors or countries, recovery can take many years or never come.

The costliest mistake is panic selling near the bottom and missing the rebound. Investors who keep contributing through downturns, rebalance into assets that have fallen and avoid leverage tend to come out better. Holding enough cash for near-term needs means you are never forced to sell at the worst moment.

Another mistake is trying to call the exact bottom, which is only visible in hindsight. And remember the asymmetry: the deeper the fall, the larger the gain needed to recover — which is why limiting position sizes before a downturn matters more than heroics during one.