Bear Market Meaning & How to Invest During One
While most investors focus on investing in bull markets, the impact of a bear market can longer be ignored. In fact, the bear market of 2022, 2020, 2008 and 2000 led to some very interesting opportunities in the long term.
Learn a bear market definition, how to analyse if we are in a bear market now and the different strategies that can be used to invest during one.
Table of Contents
What is a bear market?
Bear market definition: At the most simplistic level, a bear market meaning is a market which is experiencing a sustained fall in price. It is widely accepted that a bear market in stocks is defined as a fall of at least 20% or more. In the definition of a bear market, some look at a 20% fall from the asset's 52-week high.
The US Securities and Exchange Commission defines a bear market as a situation when a "broad market index falls by 20% or more over at least a two-month period".
What causes a bear market?
A bear market can be caused by a range of different factors. They typically occur around recessionary periods in the economy but not always. In 2022, the bear market in stocks was triggered by aggressive interest rate hikes by central banks around the world. In 2020, the bear market was caused by the global pandemic and lockdown periods.
In general, a bear market occurs when investors fear the economy is slowing and corporate profits will be hurt. This is why some bear markets can occur before a recession starts (as investors anticipate a decline and therefore sell their investments to protect any profits) and also after a recession (as investors position themselves due to a surprise or shock in an economy).
What is the difference between a bull market vs bear market?
A bear market can be caused by any number of reasons. The Great Depression bear market of 1929 was the worst in the history of the United States with stock markets falling 90% over four years. Many analysts have called for 2020 to be the beginning of a new great depression led by the impact of the coronavirus. Two other notable bear markets were caused by the 2000 tech bubble and the 2008 credit crunch.
In a bearish market, falling prices often fuel further pessimism causing sustained declines in an asset's price. Any rallies of optimism tend to be short-lived. Most bear markets are called cyclical bear markets. A secular bear market is a bearish market condition which can last between five and 25 years. The term 'bear' is used due to the way a bear swipes downwards during an attack.
A bull market is the opposite of a bear market. It is a time when the market is going up aggressively over a period of time. The higher prices attract more and more people who also participate, fuelling further optimism and greed and pushing prices up even more. A strong economy, supportive central bank and government measures can help to fuel a bull market.
Bull markets can occur in all different types of asset classes such as stocks and shares, commodities, indices, currencies, bonds and even cryptocurrencies. When US President Donald Trump took office in 2016, one of his first acts was to cut corporation tax from 35% to 21%. This helped to fuel a bull market in stock prices. In 2020, the coronavirus helped fuel a bear market in stock prices and oil but also helped gold enter a bull market.
How to invest in a bear market
When deciding how to invest during a bear market the most important rule is to first stay calm! It is very easy to make emotional and irrational decisions. Taking a step back and understanding your bigger goals will be essential in helping you decide where to invest in a bear market.
While there are many different types of strategies to focus on during bearish market conditions, there are two types that investors would contemplate - go defensive using sector rotation and/or invest in safe-haven assets like gold. Let's look at both of these individually.
1. Bear market investing using sector rotation strategies
The first thing to remember when investing is that cash is also a position. Preparing your portfolio for bearish market conditions may mean reducing the risk of investing in the market. Quite often investors will also move risk around in what is called sector rotation making sure that they are most invested in sectors that tend to perform better during a bear market.
A stock sector that tends to perform well during a bear market includes the healthcare sector. No matter what is happening in the economy or the world, people still need medicine. This is why the healthcare sector and its companies tend to perform better during a bear market.
Investors have many different options to gain exposure to the healthcare sector. One way is to use sector ETFs (exchange-traded funds). These are assets that trade like stocks and shares and help investors gain exposure to an overall sector rather than just one company.
Another sector that tends to perform well during a bear market is the consumer staples sector. Just like with health care, in good times and bad, people still need their staple items for daily living such as personal goods and cleaning products.
While investors can also use sector ETFs such as the Consumer Staples Select Sector SPDR Fund (XLP), they may choose individual consumer staple stocks such as Procter & Gamble, Costco, Walmart and others.
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2. Bear market investing in safe-haven assets
During times of economic crisis and uncertainty, demand for safe-haven assets tends to rise. In a bear market, investors may look to the gold market to help diversify their portfolios. There are a variety of ways investors can access the gold market. You can read more in the 'How to Start Online Gold Trading' article.
Using gold exchange-traded funds (ETFs) can help investors to balance their stock portfolios. For example, the SPDR Gold Shares ETF (GLD) which was launched in 2007 and was once the second-largest ETF in the world, can be bought and sold like a stock. The aim of the ETF is to reflect the performance of the price of gold bullion and is the largest physically-backed gold ETF in the world. You can learn more in the 'Best SPDR ETFs to Invest in' article.
Other assets that are considered to be a safe haven include:
- Japanese Yen
- Swiss Franc
- US Dollar
- Government Bonds
- Defensive Stocks
How to trade during a bear market
While investors can utilise the two investing strategies mentioned above there is also the option to use products such as 'contracts for difference' (CFDs) to trade different assets in a bear market.
This product allows investors to speculate on the price direction of an asset without ownership. In most cases, investors could also utilise leverage which means they would not need the full size of a position to open the trade as assets can be traded on using margin. The margin rate varies between asset classes and the categorisation of the client - retail or professional.
There are also pros and cons to margin trading which you can learn about in the ' What is CFD Trading?' article.
1. Bear market trading using hedging strategies
When preparing for a bear market, investors may not want to exit all of the investments they have built up over time. After all, if you managed to buy at a good price and it is a solid company which pays out good dividends you may want to stick with it for the long term.
In this situation, many investors may choose to hedge their exposure by shorting a stock market index. Any potential gains on their short trade may offset any losses in their long-term stock portfolio. Of course, it is easier said than done and like with any form of trading and investing it comes with different risks. However, it is a similar style of trading often used by large multinational companies looking to offset the cost of a rising or falling currency or commodity, as well as hedge funds.
In the MetaTrader trading platform provided by Admirals, there is a large range of cash indices and index futures traders can speculate on. To place a sell or short trade on a stock market index you first need to open your trading platform. If you have not yet done this, you can start your free download here. Afterwards, follow these steps:
- Open Market Watch from the View menu at the top of the platform. Or, press Ctrl+M on your keyboard. This will open up a list of symbols to trade on.
- Right-click the Market Watch window and select Symbols. Or, press Ctrl+U on your keyboard.
- The Symbols window will then open allowing you to search for your symbol or choose from a selection of the left-side such as Cash Indices CFDs. Once you've selected a symbol or a group of symbols click Show Symbol or OK.
To place a trade on an index your first need to open the chart by dragging the symbol in the Market Watch window onto the chart. Then you can simply right-click on the chart, select Trading and New Order. A trading ticket will open:
Did you know that you can test your trading ideas in both bull and bear markets by opening a demo trading account? This means you can trade in a virtual trading environment until you are ready to go live. You can open a free demo trading account with Admirals by clicking on the banner below:
2. Bear market short-selling
Another strategy available to investors is to actively short-sell stocks that are likely to perform worse in a bear market. When short selling, a trader essentially borrows the shares of a stock they do not own and then sells them in the open market. They would then look to buy back those shares at a lower price.
With CFDs, you can go long and short on a variety of different markets. In this situation, the key is to identify the cause of a bear market and find stocks that are heavily exposed to it. For example, in the coronavirus-led bear market of 2020, travel stocks were hit the hardest due to countries locking down their borders. Airlines were hit the hardest.
However, identifying which market to short-sell will depend on the cause of the bear market. In 2022, the bear market was caused by aggressive interest rate hikes from the US Federal Reserve. This led to a stronger US dollar. One of the strongest trends in 2022 was a rise in USDJPY as investors bought the US dollar while selling the Japanese Yen due to interest rate different strategies such as the carry trade.
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Why invest in a bear market with Admirals?
- Trade with a well-established, regulated company which includes regulation from the UK's Financial Conduct Authority, Cyprus Securities and Exchange Commission, Jordan Securities Commission and many others.
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- Open an Invest.MT5 investing account to buy the best shares and ETFs from 15 of the largest stock exchanges in the world.
- Open an Trade.MT4 or Trade.MT5 trading account to trade via CFDs (Contracts for Difference) in order to go long and short a market to potentially profit from rising and falling markets.
FAQs on investing in a bear market
What is a bear market?
A bear market is defined as a sustained sell-off in asset prices. The US Securities and Exchange Commission defines a bear market as a situation when a "broad market index falls by 20% or more over at least a two-month period."
How long does a bear market last?
There is no defined period of how long a bear market can last as it depends on the cause. However, what is known as that a bear market lasts a lot shorter than a bull market.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.