The bear market is a market in which the price of securities falls by about 20% or more compared to the recent maximum prices. In general, the bear market refers to a general decline in both an index, such as NASDAQ -100, or an individual commodity, like Brent Crude Oil Futures. You can think of the phenomenon’s name as a metaphor to how a bear attacks its prey. Bears hit hard with its claws on prey from up above by balancing on both feet and quickly pull them downwards to feast.
The reasons for the formation of a bear market are very diverse, but in general, the existence and continuation of a weak and slow economy leads to the creation of the bear market. Symptoms of a weak economy generally include low employment rates, disposable income, and productivity, combined with reduced business profitability.
In addition, a bear market can be triggered by a decline in investor confidence or change in tax rates. When investors lose their confidence in the upwards trend of a market, investors will leave the market, sell their securities, and take in a profit. Once a bear market’s price has dropped, speculators will want to take advantage of the opportunity to make profits, and will enter the market, thus increasing trading volume and bolstering up the prices. Once the market’s decline in price steadily slows and there is good news regarding the economy, investors will once again be attracted to the market and begin buying.
Bear markets can last anywhere between months to years. A major example of a bear market is the 53.4% drop of the Dow index between October 2007 and March 2009 during the 2008 Subprime Mortgage Crisis. More recently, the Dow Jones Industrial Average fell more than 20% in March 11, 2020 after a 52 week high, signaling a bear market triggered by COVID-19.