In the current global economic context, the word bear market has returned to investors’ vocabulary. The year 2022 has been very negative in the main world exchanges. So, since the beginning of the year, the S&P 500 (benchmark in the United States) has fallen by about 20%, according to an analysis by the newspaper ECO. In Europe, the situation has been similar with the main benchmark (Stoxx 600) having fallen by more than 15% since the beginning of the year. negative behavior in the main world stock exchangesaccording to experts, is explained by the following reasons: what does a bear market consist of, as well as the main bear markets that have taken place throughout the history of markets.
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What is a bear market?
The bear market on the stock exchange, consists of a period of continued decline in the stock market as a whole. Thus, to consider that we are in the presence of a bear market, equity indices must fall by more than 20% against their recorded highs. To verify whether the US market is in a bear market situation, the evolution of the main stock index (S&P 500) must be analyzed., which aggregates the 500 largest companies listed on the American stock exchange. As an example, if on January 2, 2022 the S&P 500 was at 5,000 points, to consider that it entered bear market territory, it would have to fall below 4,000 points. Historically, the bear markets can stem from several factorsNonetheless the most common are as follows:Crises in the banking and real estate system;Geopolitical tensions and wars;Economic crises.
Major bear markets throughout history
As we mentioned, bear markets have been common throughout history. However, their occurrence has not been uniform. In the period between 1928 and 1945, that is, until the end of the Second World War, there were a total of 12 bear markets, which for a total of 17 years, is a very high number. . However, in After World War II, there were a total of 14 bear markets, which means there is a bear market every 5 years.In addition to the occurrence of bear markets having varied over time, in terms of the size of the drops, they were different in each of the bear markets.ANDm average terms, the stocks fall during a bear market has been around 36%. Nonetheless, the size of declines on average is greater when the bear market precedes an economic downturn. It is precisely for this reason that several analysts have mentioned that the size of the possible fall in the markets depends on whether or not there is an economic recession as early as 2023. Of the 26 bear markets that have taken place since 1928, only 15 preceded an economic downturn.. However, 11 of the 14 bear markets since 1945 have subsequently experienced recessions.
Major bear markets in history
Although throughout history there have been many bear markets, below we highlight some of the main ones.
Crash of 1929
The 1929 crash was undoubtedly the biggest bear market recorded in the modern history of financial markets. Over a period of three years, the Dow Jones industrial benchmark index fell by 89% cumulatively.
The 1973 bear market, in terms of duration, was the second largest in history, after the Great Depression of 1929.. During this period there was a cumulative drop of about 48%. The markets were in bear territory, that is, an accumulated fall from previous highs of 20%, for 21 months. Nonetheless, only reached pre-1973 crisis highs, after 69 months. This bear market occurred due to the strong inflation that was registered in the period, as well as the economic stagnation.
dotcom bubble in 2000
The bear market that followed the American stock market after the bursting of the technology bubble was one of the most significant in the modern history of markets. This bear market followed the big bubble that was created in the sector’s actions. technology between 1994 and 2000. During this period, the S&P 500 had a cumulative drop of about 49%having remained in the territory bear for 31 months. Additionally, only recovered from pre-crisis highs after 56 months.
2008 financial crisis
The 2008 financial crisis also marked one of the darkest periods on the stock market. This period of crisis was due to the crisis in the banking and real estate sector, which created great distrust in the financial markets. During this crisis, the S&P 500 remained in bear market territory for 17 monthshaving recovered from pre-crisis highs after 49 months.Despite the relevant duration of the bear markets mentioned above, there were also others, much less long in terms of duration. Thus, it stands out, for example, the 2020 bear market, after the beginning of the Covid-19 pandemic, in which markets were in bear territory for a month, having recovered from pre-crisis highs after five months.
Investing during a bear market
A bear market, as a rule, is a period of great panic in the financial markets, which often leads small investors to get rid of their positions, selling them at a loss. Often, these periods lead these investors to quit investing in stocks.However, historically, these periods have been good times to invest. In fact, if you look at the various bear markets in history, the periods following these have been of great recovery in the markets. Incidentally, the S&P 500 average annual return from 1957 to the end of 2021 was more than 10%. In other words, bear markets are actually understood as a opportunity to reinforce positions in solid companies and that due to the feeling of panic in the markets, they are quite cheap. In order to survive a bear market and make the best use of the subsequent recovery, you must take into account the following points when investing:Invest only what is available to lose. Don’t invest money you may need in the short term;Look for value stocks. Normally, in periods of great panic, there is a general sale in the stock market, causing value companies to be excessively penalized;Invest in more defensive stocks, which are less penalized in situations of economic recession. An example of this type of companies are those that sell essential goods, such as food. financial availability, as well as the risk you are willing to take, consider whether you should really go ahead and what values you can apply.