What is Bear Market? Definition- Best Insights (2025)

Definition

A bear market represents a sustained fall in stock prices, typically marked by a drop of 20% or more from recent highs in major stock indexes.

In simpler terms, a bear market is when a financial market faces a significant and extended decline, usually over 20%, triggered by investor pessimism, widespread selling of stocks and other assets, and a weakening economy.

Although commonly linked to broad market indexes like the S&P 500, bear markets can also impact individual stocks or commodities if they decline 20% or more over a couple of months. These downturns often occur alongside broader economic slowdowns or recessions and are the opposite of rising bull markets.

Key Takeaways

• A bear market arises when market prices fall by 20% or more, usually accompanied by negative sentiment and an economic downturn.

• Bear markets may be short-term (cyclical) lasting weeks to months, or long-term (secular) extending over years or decades.

• Investors can still earn profits in a bear market through strategies like short selling, put options, and inverse ETFs.

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Understanding Bear Markets

Stock prices generally mirror investor expectations of a company’s future performance. If earnings fall short or growth slows, investors may sell, pushing prices down. Herd behavior and fear can worsen this trend, resulting in prolonged price declines.

One common measure is a 20% drop from a peak, though it’s a symbolic threshold. Others define a bear market as a phase where investors avoid risks, opting for safer investments. Such periods can stretch for months or even years.

Bear markets are often caused by:

• A sluggish or declining economy

• Asset bubbles bursting

• Pandemics and wars

• Geopolitical conflicts

• Major shifts in the economy (like going fully digital)

Signs of a weakening economy include:

• High unemployment

• Lower disposable income

• Declining productivity

• Decrease in business profits

Government policy shifts, like tax changes or interest rate hikes, can also spark bear markets. Loss of investor confidence may lead to mass sell-offs, accelerating the decline.

Bear markets can be long or short. A secular bear markets may span 10–20 years with poor returns, while a cyclical bear markets lasts from a few weeks to several months. Temporary market rallies may occur within secular bear markets, but they often don’t last.

Recent Bear Markets

• On Dec 24, 2018, U.S. markets nearly hit bear territory with a sharp drop close to 20%.

• In March 2020, the S&P 500 and DJIA plummeted into a bear market due to the COVID-19 outbreak.

• The previous major bear markets was from 2007–2009, during the Financial Crisis, with the S&P 500 losing 50% of its value.

In early 2020, the global market sank quickly following COVID-19 fears. The DJIA dropped 38% from its February high to a March low. However, by August 2020, the S&P 500 and Nasdaq 100 reached new highs.

S&P 500 Bear Markets and Recoveries

Bear Market Guide_ Definition, Phases, Examples & How to Invest During One

Phases of a Bear Markets

1. Phase One – High prices and investor optimism. Eventually, investors begin selling to lock in profits.

2. Phase Two – Prices fall quickly, trading volume drops, and economic indicators weaken. Panic begins.

3. Phase Three – Speculators re-enter, creating minor rallies and higher trading volume.

4. Phase Four – Prices fall more slowly; positive news and lower prices draw investors back, potentially signaling a bull market.

The “Bear” and the “Bull”

The term “bear markets” comes from how a bear attacks, swiping downward. In contrast, a bull thrusts upward, symbolizing rising markets. That’s why declining markets are called bear markets, while rising ones are called bull markets.

Bear Markets vs. Corrections

Don’t confuse a bear markets with a correction, which is a short-term decline under two months. Corrections might be ideal for long-term investors to enter, but bear markets rarely present clear buying points since predicting the bottom is extremely difficult.

Between 1900–2018, the DJIA saw around 33 bear markets, averaging one every three years. Notable examples include:

• The 2007–2009 Financial Crisis, with a 54% drop in the DJIA.

• The 2020 bear markets, caused by COVID-19.

• The March 2022 bear market in the Nasdaq Composite, driven by inflation and global tensions.

Short Selling in Bear Markets

Short selling is a way to profit during falling markets. It involves selling borrowed stocks and buying them back at a lower price. For example, shorting 100 shares at $94 and buying them back at $84 results in a $1,000 profit. However, if prices go up, losses can be huge.

Warning: Short selling is very risky and not recommended for beginners.

Read more: What is bear market?

Put Options & Inverse ETFs in Bear Markets

• A put option lets the holder sell a stock at a specific price before a set date. It’s used to hedge or bet against falling prices.

• Inverse ETFs move opposite to the index they track. If the S&P 500 drops 1%, the inverse ETF gains 1%. Some use leverage for 2x or 3x movements, helping investors profit or hedge in bear conditions.

Real-World Examples of Bear Markets

• In October 2007, the S&P 500 peaked at 1,565.15 but crashed to 682.55 by March 2009 due to the housing crash.

• On Dec 24, 2018, markets almost entered a bear markets again.

• On March 11–12, 2020, the DJIA and S&P 500 officially entered bear territory due to COVID-19.

• From Feb 19 to Mar 23, 2020, the S&P 500 fell 34%.

• The Dot-com crash (2000–2002) erased 49% of the S&P 500’s value.

• The Great Depression started with the 1929 market crash.

Read more: Bear market | Definition & Facts

Bear Market vs. Bull Market

The core difference is:

• A bear market = major downturn

• A bull market = major upswing

Markets thrive during a bull run and suffer during a bear phase.

Is It Smart to Buy During a Bear Market?

Long-term investors may find great opportunities during a bear markets when stocks are cheap. If you’re patient, it could be a great time to buy. But short-term traders may need alternative strategies.

Should I Sell Stocks During a Bear Market?

In most cases, no. Selling in panic can hurt in the long run. A diversified portfolio with safe assets like bonds, defensive stocks, and cash can withstand bear markets better. Holding on can lead to strong gains once the market recovers.

The Bottom Line

A bear market signals a drop in financial markets and often reflects an ailing economy and low investor confidence. It’s typically marked by a 20%+ price fall and can last from weeks to years.

Long-term investors may see it as a chance to buy quality stocks at a discount. Short-term traders might explore strategies like short selling, put options, or inverse ETFs to navigate the downturn.

Summary: Bear Market vs Bull Market

Understanding market trends is key to becoming a successful investor. Here’s a quick comparison to help you remember the difference between bear and bull markets:

Final Thoughts

Whether you’re facing a bear or riding a bull, the key is to stay informed, manage your risk, and invest with a long-term mindset. Every market cycle has its ups and downs — smart investors learn how to navigate both.