Entering the Bear Market: Understanding the Characteristics, Causes, and Strategies to Cope

In the cyclical evolution of the capital markets, 「Bull Markets」 and 「Bear Markets」 cycle back and forth like tides, representing an inevitable market phenomenon that investors must face. Many investors enjoy the prosperity of bull markets but expose strategic vulnerabilities during bear market tests. Understanding the essence of bear markets and how to respond is a key topic in an investment career.

Definition and Classification of Bear Markets

A bear market (Bear Market) refers to a market condition where the price of the underlying asset drops more than 20% from its high point, and this downward trend can last from several months to several years. Conversely, when prices rise more than 20% from a low point, it is called a bull market (Bull Market).

The U.S. stock market in 2022 is a typical example: the Dow Jones Industrial Average fell from 36,952.65 points on January 5 to below 29,562.12 in mid-September, and finally closed at 29,260.81 on September 26, marking the official entry into a bear market.

It is important to note that the concept of a bear market covers all asset classes—not limited to stocks but also including bonds, real estate, precious metals, crude oil, exchange rates, and even cryptocurrencies.

Important distinction: Bear markets and market corrections are often confused, but their nature differs. A correction refers to a short-term decline of 10%–20% from a high point, characterized by frequent and short cycles; whereas a bear market is a long-term systemic decline, with a much deeper impact on investor psychology and asset allocation.

What Are the Typical Features of Bear Markets?

Feature 1: Significant Price Declines

The primary sign of a bear market is a decline of over 20%. According to the U.S. Securities and Exchange Commission, when most stock indices fall 20% or more within two months, the market enters a bear phase. Historical data shows that the S&P 500 index has experienced 19 bear markets over the past 140 years, with an average decline of 37.3%.

Feature 2: Longer Duration

Bear markets are not short-term fluctuations but long-term trends. Historical statistics of the S&P 500 show that the average duration of a bear market is 289 days. However, this is just an average—some bear markets are shorter (e.g., the COVID-19 bear market in 2020 lasted only one month), while others last several years (e.g., after the dot-com bubble burst in 2000). On average, a bear market requires a decline of about 38% before reversing, and returning to previous highs usually takes years or longer.

Feature 3: Accompanied by Economic Deterioration

Bear markets often coincide with economic recessions, rising unemployment, and deflation. In this context, central banks typically implement quantitative easing policies to rescue the market. Historical experience indicates that the upward movements before quantitative easing are often bear market rebounds rather than true bottoms.

Feature 4: Excess Asset Bubbles

Asset prices tend to fluctuate far beyond their fundamentals. In market environments where bear markets occur, severe bubbles are often present. It is difficult for bear markets to appear during early stages of economic expansion, but when asset bubbles accumulate and investors display irrational enthusiasm, central banks may tighten liquidity to curb inflation, ultimately triggering phased bear markets.

Multiple Dimensions Revealing the Causes of Bear Markets

The formation of bear markets is usually due to the combined effect of multiple factors:

Loss of Market Confidence

When investors become pessimistic about economic prospects, consumers tend to save rather than spend, companies cut hiring and investment, and capital markets downgrade earnings expectations. The resonance of these three factors causes stock prices to plummet in the short term.

Excessive Price Bubbles

During market overheating, asset prices are driven to unsustainable levels, then begin to reverse. This triggers a stampede effect, accelerating declines. Sharp fluctuations of rapid rises and falls destroy market confidence and worsen the situation.

Geopolitical and Financial Risks

Major events such as bank failures, sovereign debt crises, and regional conflicts can trigger panic. For example, the Russia-Ukraine war pushed energy prices higher, increasing global uncertainty, while U.S.-China trade frictions disrupted supply chains.

Rapid Changes in Monetary Policy

Interest rate hikes and balance sheet reductions by the Federal Reserve tighten liquidity, suppress corporate and consumer investments, and lower stock valuations.

External Shocks and Unexpected Events

Natural disasters, pandemics, energy crises, and other unforeseen events can trigger global market crashes. The COVID-19 pandemic caused panic in global markets in 2020.

Review of 6 Major Bear Markets in U.S. History

2022 Bear Market: Systematic Adjustment Under Triple Blow

The bear market that began on January 4, 2022, was caused by multiple factors: post-pandemic global central banks’ excessive QE leading to inflation, the Russia-Ukraine war pushing up commodity prices, and the Federal Reserve responding with aggressive rate hikes and balance sheet reductions, causing market confidence to collapse. The deepest declines were in technology stocks that had surged in the previous two years. The continuation of the rate hike cycle suggests this bear market may last at least until 2023.

The COVID-19 Triggered Shortest Bear Market in 2020

At the end of 2019, Wuhan pneumonia outbreak, which spread globally in early 2020, triggered panic. This was the shortest bear market in history— the Dow Jones fell from 29,568 on February 12 to 18,213 on March 23, but by March 26, it closed at 22,552, rebounding 20% out of bear territory. Global central banks learned lessons from 2008 and quickly launched QE to stabilize liquidity, rapidly resolving the crisis and ushering in two consecutive years of super bull markets.

The 2008 Financial Crisis: Longest and Deepest Decline

From October 9, 2007, when the Dow closed at 14,164.43, to March 6, 2009, when it fell to 6,544.44, the decline was 53.4%. The root causes included the dot-com bubble burst in 2000 and the market confidence recession after 9/11, prompting the Fed to cut rates sharply. Low interest rates led many investors to borrow for housing, causing a short-term housing boom. Banks extended loans to borrowers with no repayment ability and packaged these into financial products, transferring layers of risk. When housing prices soared and then the Fed raised interest rates to curb inflation, housing investors exited, leading to a chain collapse. Despite government stimulus in 2009, the bear market persisted until March 2013, when the Dow recovered to its 2007 high, marking the end of the crisis.

The 2000 Dot-com Bubble: Concept Stocks Run Amok

In the 1990s, the development of the internet led to many high-tech companies going public, but most lacked real profits, relying solely on valuation dreams and hype. Valuations became severely inflated, and any withdrawal of investment triggered stampedes. The end of this longest bull market in 2000 also triggered a recession the following year, compounded by the September 11 terrorist attacks, which further worsened the stock market crash.

Black Monday 1987: Program Trading Amplifies Panic

On October 19, 1987 (Monday), the Dow Jones Industrial Average plummeted 22.62%, marking a historic moment on Wall Street. The U.S. stock boom that started in 1980 had lasted several years, but by 1987, the Fed was raising interest rates and tensions in the Middle East increased, causing market consolidation. The key was the emergence of program trading, which automatically triggered stop-loss sales during short-term sharp declines, accelerating the fall. The government learned lessons from the 1929 Great Depression, and in the panic’s aftermath, quickly introduced measures such as rate cuts and circuit breakers to stabilize. The market returned to its previous high after 16 months, much faster than the decade-long decline after 1929, indicating that markets had learned to digest bearish signals.

The 1973-1974 Oil Crisis: Systemic Collapse in an Era of Stagflation

After the October 1973 Middle East War, OPEC imposed an oil embargo and production cuts supporting Israel, causing oil prices to soar from $3 to $12 per barrel within six months (a 300% increase). This worsened the inflation already present in the U.S. (CPI had risen to 8% in early 1973), leading to stagflation—GDP shrank by 4.7% in 1974 while inflation reached 12.3%. U.S. stocks declined from their January 1973 highs, and the oil crisis and Watergate scandal further undermined confidence, with the S&P 500 falling 48% and the Dow halving. The bear market lasted 21 months, making it one of the longest and deepest systemic collapses in modern U.S. history. Subsequently, the Fed’s rate hikes to curb inflation had limited effect, and economic recovery was slow.

How to Adjust Investment Strategies During a Bear Market

Strategy 1: Actively Reduce Portfolio Risks

During bear markets, maintain sufficient cash to cope with volatility and avoid excessive leverage. Selectively reduce holdings of high P/E and high P/B assets—these assets tend to have severe bubbles, with large gains in bull markets and large declines in bear markets.

Strategy 2: Lock in Defensive Assets and Undervalued Quality Stocks

In addition to holding cash, focus on relatively counter-cyclical assets such as healthcare, consumer staples, and niche companies. Also, choose well-performing companies with deep declines—based on historical P/E ranges at the low end, build positions gradually.

These target companies must have sufficient competitive moats to sustain advantages for more than three years; otherwise, if their competitiveness wanes during market recovery, they may not return to previous highs. For investors lacking confidence in individual stocks, ETF options tracking broad indices can be considered, waiting for the next economic recovery phase.

Strategy 3: Flexibly Use Financial Instruments to Seek Opportunities

Bear markets have higher probabilities of declines, and short-selling success rates tend to improve. Contracts for Difference (CFD), as derivatives, allow traders to conduct two-way trading without holding the underlying asset, covering indices, forex, futures, stocks, metals, and other commodities. CFDs offer the advantage of providing a short-selling mechanism, enabling investors to seek downward opportunities during bear markets. Many CFD platforms offer demo accounts to familiarize traders with operations, reducing real trading risks.

How to Identify Bear Market Rebounds and True Bottoms

Bear market rallies (or bear traps) refer to short-term upward movements lasting from days to weeks during a downtrend, with an increase of over 5% often considered a rally. Such movements can mislead investors into thinking a new bull market has begun. However, unless there are continuous monthly increases or a rise exceeding 20% out of bear territory, it remains just a rally.

Key Indicators to Distinguish Rebounds from Bull Markets

Observe the following signals to determine if a true reversal has occurred:

1. Over 90% of stocks trading above their 10-day moving average
2. More than 50% of stocks rising
3. Over 55% of stocks hitting new highs within 20 days

Meeting these conditions can confirm a bull market signal; otherwise, it is merely a technical rebound within a bear market.

Summary

The arrival of a bear market is not necessarily frightening; the key lies in recognizing the features of a bear market early and adopting reasonable investment responses. Investors can seek opportunities within risks by using tools like short-selling while protecting assets. Adjusting mindset and timing are crucial, as both long and short positions can be profitable.

For conservative investors, the most important thing during a bear market is patience and strict adherence to stop-loss and take-profit rules, to protect assets amid volatility and seize opportunities. True investment experts do not fear bear markets; instead, they find the best opportunities for deployment amid market panic.