What is a bear market and should I be worried when it happens?
A bull market is characterized by an upward movement in the stock markets. Bull markets can last for a long time, and it is difficult to predict an end to a bull market. The end of a bull market marks a new bear market. These market movements go hand in hand and ultimately set the tone for a longer trend in our financial markets. It takes years of experience to understand the macro trends that drive financial markets.
A bear market is defined as a 20% decline from recent highs. Bear markets are characterized by people losing their jobs, gross domestic product (GDP) deteriorating, and the stock market falling significantly. It is difficult to identify a bear market based on historical patterns. Although bear markets may be inevitable, knowing about them can help investors deal with them better.
The various factors that can lead to a bear market are listed below
- • Global pandemic or health crisis – Covid-19, Smallpox, Yellow fever etc
• Geopolitical tensions – Russia Ukraine War, China-US trade war, etc
• Global recession – an extended period of economic decline around the world
• High Stock Valuations – This happens when the valuations of companies tend to go beyond what’s rationally acceptable
The arrival of a bear market should not always be interpreted by investors as a cause for concern. A sharp correction in the indices often causes panic among market participants. Short-selling can be profitable in a bear market, but it is extremely risky. Therefore, it is not recommended for investors with limited knowledge and exposure. If you're choosing an investment option during a fall, you may have to keep your sanity intact. Long-term investors avoid making rash decisions based on their instinct. The safe bet that will help you out of the ambiguous situation is a long-term investment plan. Since a bear market is usually short-lived, investors can make larger gains by investing. Bear markets can create unique buying opportunities for investors.
Analyzing historical patterns will enhance the ability to navigate unpredictability. By reviewing previous bear markets, you can identify the best-performing asset classes. There is an inverse relationship between bonds and stocks. Bond prices rise when stock prices fall, and vice versa. Therefore, investing in top-rated (hi-grade) bonds during a bear market is a good strategy. Investing in high-grade bonds is the safer option to avoid losses. Bear markets are temporary and usually recover in a few months. So, wait and see, and ride out the situation by investing smartly.
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