Bear markets are periods when stock markets decline for an extended period. These downturns typically involve drops of twenty percent or more in stock values. Bear markets are the opposite of bull markets, where prices rise for long periods.
Bear markets are often caused by declining corporate profits or corrections in overvalued stock markets, where prices fall to more historically fair values. Bear markets usually begin when investors, alarmed by lower earnings or high stock values, start selling their stocks. This mass selling causes prices to drop, sometimes significantly. The falling prices then prompt more investors to sell out of fear of losing their investments, perpetuating a downward spiral.
Throughout the history of the United States, spanning over two centuries, numerous bear markets have occurred. A notable example of a prolonged bear market occurred in the 1970s, during which stocks experienced a downward trend followed by a sideways movement for more than a decade. Such protracted bear markets often deter potential buyers from entering the market, further exacerbating the downturn. With fewer buyers active in the market, selling pressure continues to dominate, as sellers consistently outnumber buyers on the stock exchanges.
For investors with a long-term perspective, bear markets can present excellent opportunities. Those who intend to hold stocks for decades may find that bear markets offer optimal entry points to purchase stocks at discounted prices. While many individual investors may panic and sell their stocks continuously during a bear market, this is precisely the wrong time to sell.
Instead, bear markets provide astute investors with the chance to identify fundamentally strong companies that are likely to perform well in the long run, even if their share prices temporarily decline by twenty or forty percent along with the broader market. Good companies, like Gillette which produces razors, will still have stable markets even if their stock prices fall significantly during a bear market.
Making money in a bear market requires distinguishing a company’s core business from its short-term share price. In the near term, a company’s fundamentals and stock prices may not align. Thus, discounted prices on good companies in a bear market are akin to clearance sales at a favorite store—an optimal time to buy heavily discounted products. History has shown that the stock prices of strong companies will eventually rebound to more realistic and fair valuations.
