What Is a Bear Market? Are We In One?

Difference From a Bull Market

bull and bear on see-saw
The bull and bear are always fighting on Wall Street. Stephen Puetzer/Getty Images

A bear market is when the price of an asset class declines substantially over time. Most analysts announce a bear market when prices have fallen 20 percent or more from their 52-week high. The term is widely used when talking about the stock market, especially the major indices. These include the Dow Jones Industrial Average, the S&P 500, and the NASDAQ.

Bear markets also occur in other investment asset classes, such as a gold, currencies, and U.S. Treasuries.

 No one uses the term to describe price drops in consumer goods, such as computers, automobiles, or TVs. That's called deflation.

Are We in a Bear Market Now?

A bear market occurs when the major indices continue to go lower over time. They will hit new lows. More important, their highs will be lower than before as well. The average length of a bear market is 367 days. The conventional wisdom says it usually lasts 18 months. Bear markets occurred 32 times between 1900 and 2008, with an average duration of 367 days. This is around once every three years.

A bear market can be kicked off by a stock market crash. That's is when the market drops 10 percent or more in a day or two. It's much worse than a stock market correction. That's when the major indices fall ten percent. 

Bear markets accompanied by recessions. That's when the economy stops growing and then contracts. That causes layoffs and high unemployment rates.

A bear market is difficult to predict. It may look like a correction until you've already lost more than 10 percent of your portfolio. It helps if you know where the economy is in the business cycle. If it's just entering the expansion phase, then a bear market is unlikely. But if it's in an asset bubble or investors are behaving with irrational exuberance, then it's probably time for the contraction phase and a bear market.

For more, see Where Are We in the Current Business Cycle?

Bull Market vs Bear Market

A bull market is the exact opposite of a bear market. It's when asset prices rise over time. "Bulls" are investors who buy assets because they believe the market will rise. "Bears" sell because they believe the market will drop over time. Whenever sentiment is "bullish," it's because there are more bulls than bears, and they can actually create a bull market. These two opposing forces are always at play in any asset class. In fact, a bull market will tend to peak, and seem like it will never end, right before a bear market is about to begin.

Bear Market Rally

A bear market rally is when the stock market posts gains for days or even weeks. It can easily trick many investors into thinking the stock market trend has reversed, and a new bull market has begun. But nothing in nature OR the stock market moves in a straight line. Even with a normal bear market, there will be days or months when the trend is upward. But until it moves up 20 percent or more, it is still in a bear market.

Secular Bear Market

Normal bear market cycles are also known as cyclical bear markets. A secular bear market is much longer term.

It lasts anywhere between five and 25 years, although the average length is around 17 years. During that time, normal bull and bear market cycles can occur. But asset prices will generally return to the original level. There is often a lot of debate as to whether we are in a secular bull or bear market. For example, some investors believe we are currently in a bear market that began in 2000. (Source: "," MoneyCrashers.)

Examples: Bear markets are what created the old saying "It's not how much you make, it's how much you keep." That's because a ferocious bear market can easily wipe out months or even years of hard-won gains made in a bull market. It's important to not get too greedy, and to take profits on a regular basis.