A bear market is a financial market condition characterised by a prolonged period of declining asset prices, typically for a specific sector or the overall market. In a bear market, investor sentiment is generally pessimistic, and there is a widespread expectation that prices will continue to fall. This negative outlook often leads to increased selling activity as investors try to avoid further losses.
Key characteristics of a bear market include:
- Falling Prices: Asset prices, such as stocks, bonds, commodities, or real estate, experience a sustained decline over an extended period, typically at least 20% from recent highs.
- Economic Downturn: Bear markets are often associated with economic recessions or slowdowns, as declining corporate profits and economic indicators contribute to the negative sentiment.
- Investor Fear: Fear and uncertainty dominate investor behaviour during a bear market. This leads to reduced buying activity and an increase in selling as investors seek to protect their capital.
- Volatility: Bear markets are characterised by increased market volatility, as prices can experience significant swings both upward and downward.
- Decline in Trading Volume: As the bear market progresses, trading volumes often decrease because there is less enthusiasm for buying and selling.
Bear markets can have a significant impact on investors' portfolios and can last for months or even years. It is important for investors to be aware of the market conditions and consider adjusting their investment strategies accordingly. Many investors adopt defensive strategies during bear markets, such as diversification, investing in assets that historically perform well during economic downturns, or even temporarily moving to cash or other safe-haven assets.