Historically, bear markets have occurred roughly every 3.6 years since the 1920s, with durations averaging about 289 days.
For example, during the 2000 Dot-com crash, the NASDAQ plummeted nearly 78% over a 31-month period. In the 2008 financial crisis, the S&P 500 fell 57%, erasing nearly $11 trillion in market value.
Each of these bear markets reflected deep economic troubles, with significant losses not just in equity values but in investor confidence, often taking years for full recovery and return to pre-crash levels.
Major Indices Drop by 20%
A drop of 20% or more of the major indices is an unambiguous sign of a bear market. It reflects a dramatic fall in the economic outlook and deeply pessimistic mood among investors. For instance, the S&P 500 fell by nearly 57% from peak to trough during the 2008 global financial crisis . Let us assume that the Dow Jones Industrial Average makes up 30,000 points.
Accordingly, a fall to 24,000 points will make 20%, which, in turn, confirms that a bear market takes place. It is crucial to note that these periods are not mere fluctuations: they reflect deep underlying changes in expectations reflecting some major economic setback and often a systemic financial crisis .
There has been a series of these falls or even steeper crashes in history. Key examples include the Great Depression, the dotcom bubble burst, and the 2008 financial crisis. Since 1929, there were many declines and crashes significant enough to be considered bear markets. Overall, declines of 40% or more have taken place on several occasions on broad indices since 1987.
These markets do present opportunities and time to remember the famous quote of Warren Buffett: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Rapid Selling and Panic
The strong selling and panic that characterize a bear market are a quick increase in sell orders followed by a dramatic drop in the stock prices. They mostly come about when the general market is feeling some sense of uncertainty resulting in the fear based departure from the equities by investors. To give an example with data, by March 2020, during the early days of the COVID-19 pandemic, Dow Jones Industrial Average shed over 30% of its value within four weeks. This was one of the fastest drops in market history if not the highest. The data can be corroborated by the high volumes of trading that were recorded. As a result of the panic that had gripped investors across the market, the trading volumes shot up with some days recording more than double the average per day.
Relatedly, the panic is equally visible in the single day that is ascribed to have presented signs of panic thus far. By October 19, 1987, the equally famous day after it was labeled “Black Monday”, Dow had misplaced almost 22.61%. The panic was almost palpable with the kind of speed executed being unprecedented up to that time.
Linkedly, to paraphrase legendary investor Sir John Templeton, “The four most dangerous words in investing are: ‘this time it’s different’. Still, every bear market presented itself as unique crisis be it the financial crunching of the financial sector, a single terrorist attack or all-out global crisis in form of a pandemic.
Prolonged Market Downturn
Historically, the extended market downturn is the market of a bear, which lasts for an extended period. There are numerous reasons to explain the occurrence, such as satisfying the economic indicators becoming weaker, diminishing corporate earnings, or instability within the geopolitical world.
To provide an in-depth example, the bear market of 2007-2009, the S&P 500 decreased by approximately 57% throughout the 18-month long period. As witnessed, the duration of such a declined clearly indicates that the economic complications that this timeframe witnessed roots from such a history economic issue of the housing market collapse along with the following financial crisis that the United States encountered.
An example of a similar scenario is viewed through historical context either. Following the burst of the Dot-com bubble at the beginning of the century, NASDAQ Composite declined by 78% throughout the approximate 30 months that the bear market lasted.
Other than the length, other similarities exhibited in this case is the fact that the declined value was a result of the overvaluation of a large number of non-dividend paying technology stocks that could not satisfy the hyped level of growth that was publically expected. Lastly, in relation to stock market downturns, Warren Buffett stated, “Only when the tide goes out do you discover who’s been swimming naked.” How could investment strategies be altered and strengthened using this adage?
Short Selling Increases
Unless the overall economics changes in particular due to expected development, short selling is closely tied to a bear market for the most part, as the decrease in stock values is anticipated. Therefore, an increase in activity and short selling implies a higher number of investors starting to presume the collapse of specific stock prices, effectively serving as a measure of general sentiment.
For instance, there were signals of the 2008 financial crisis escalating, with news on short selling being one of the first indicators provided in newspapers based on a report by the regulatory bodies in the securities market .
They announced that trading in shares of major financial companies before the Lehman’s Brothers crisis had increased short sales by about 40-50% in the latest months, with the lack of confidence in the financial industry becoming one of the main reasons for the downturn .
Therefore, even if there is no data on the number of companies involved, market analytics can provide the scale of the process. For instance, if the Short Interest Ratio is more than 5, it takes five or more days to conclude all short selling, implying the substantial bear market sentiment .
Finally, George Soros, a very successful speculator, has a famous saying, “Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected”, which reflects the fundamental strategy of short selling.
Dividend Stock Stability
In bear markets, dividend-paying stocks’ stability serves as a beacon for investors, identifying safe havens where they could preserve their fortunes.
Such stocks are typically associated with companies characterized by solid financial health capable of preserving dividends even throughout economic downturns. Consider the performance of these stocks during the 2008 financial crisis.
Whereas the S&P 500 went down by more than 50%, many dividend aristocrats achieved far smaller drops, and rebounded meaning enough time to start offering better dividends such as Johnson & Johnson and Procter & Gamble, both dropped under the market average and more importantly, they continued to pay increasingly more, solid dividends.
Therefore, the use of dividend yield and payout ratio data is crucial in such analyses. In somewhat “normal” economic times, the average dividend yield across all stocks inside the S&P 500 is typically around 2-3%.
In bear markets, if the yield of dividend stocks does not drop or, in the best of cases, starts climbing back up while all other stocks are decreasing, then these stocks are to be considered more stable.
If these stocks’ payout ratio does not climb above 60%, a common threshold, then this temperature check often signifies that the company’s earnings and cash flow position are solid enough, and the dividends are safe.
Benjamin Graham was often quoted as saying, “Investment is most intelligent when it is most businesslike”, and at no time is this adage truer than during bear markets.
