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What is a Bear Market?

We recently stated that this is a “Bear Market.” So what does that mean?

It’s not all that scary, at least not once the market really settles into bear territory. In fact, it can be a great time of opportunity for many investors, particularly away from stocks. It’s worth spending a moment contemplating what a bear market is and why it’s important.

Today’s bears are not irrational.

The term is not about the tendency for bears to attack. In the earliest days of the nation, cyclical markets for various frontier products were much more common than anything like investing. It has been said that brokers for fur trappers were especially unscrupulous, often selling furs to the bulk market before they had them in an effort to drive down prices before they had to pay the trappers who cam in from the woods.

The phrase “selling the bearskin before the bear was shot” is a term for what is essentially short-selling and driving down the market.

Does that mean that a down market is all about manipulation? Certainly, if there was no emotion or monopoly, markets would be much more stable than they are. But sentiment genuinely rules, at least when everyone becomes nervous. More importantly, we should never forget that the stock market is nothing more than a market for stocks. There are simply other places to put money.

There are two distinct phases to a bear market. There is the plunge down to a level of stability, and then there is the sideways period where very little happens for up to a year. Consider this chart of the last four bear markets:

Once the downturn is accomplished, there’s not much more to say about it Investors have other places to put money and no one pays attention to stocks. In many ways, this is a good thing for the economy. While there is natural risk aversion present when everyone is nervous, the real investment opportunities are in non-public smaller companies. Once money turns their direction, there is a surge in research and development, along with all of the things which actually grow the economy.

Consider a bear market to be nothing more than a necessary pause.

This is the season for worry.

That’s not to say that there isn’t pain. On the way down there can be a stomach-wrenching plunge that wipes out capital. You can see from the last bear markets that this is not the dominant feature, but it does happen. If you consider this stock market a bubble, caused by too much money in the system, it’s important to note that capital markets do have a way of incinerating excess money supply.

This is something we have to watch for in the early stages.

Once we are settled into a stable pattern, however, there will be little to worry about. There won’t be anything to cheer, either. A typical bear market takes a solid year or two of mostly sideways grinding, sometimes a little bit down.

More importantly, the net effect on the general economy is never obvious. Consider that there is a definite shortage of skilled workers in many areas. Wage inflation is certainly picking up, at least for some professions. That is bad for big business, but good for the workers. It will contribute to the sideways lack of interest in stocks, but feel pretty good to a lot of people.

It’s not actually a science.

Should we fear the bear, then? The long answer is no, if things work out well. More money to workers is good in the long run, as is more investment in smaller start-ups that are not yet publicly traded. This could actually be a good thing, and history shows us that pauses in the stock market are apparently necessary to refresh the economy.

Then again, this bear market reflects growing tension regarding trade wars and slowing growth due to the aging of Baby Boomers and other demographic issues. There is also the possibility that a lot of capital will simply be lost, in that it never really existed in the first place. Market forces do indeed work both ways, and we are not yet set up to manage a time of slow growth.

Risk aversion can naturally set in, meaning that smaller companies which drive future growth receive even less money, not more.

These are the things to look for. But the bear market itself is nothing but a pause, a moment when stocks are no longer front and center in the economy. That is not necessarily bad, but it can be a signal that things are in terrible shape. We have reason to believe that both the forces of refreshment and decline are present, so we can’t yet say which is more important.

One thing is certain: fasten your seatbelts, as the ride is not over yet.

2 thoughts on “What is a Bear Market?

  1. Good article. If I had left my investments alone beginning in 1980, instead of the occasional panic or micro-manipulation, I would now have 10 X what is currently in my IRA. That being said: Trade stops on individual positions are also a good way of minimizing losses.

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