What Is A Bear Market?Answering the question "What is a bear market?" could clearly be very quick and easy or shockingly complex! We have tried to offer a conclusive bear market definition elsewhere. However, should you be hoping for a more indepth discussion of the complexities and impacts of bear markets, this is the page for you! Firstly, it is worth pointing out that recessions and depressions are the causes of these stock market conditions. Business reality always - somehow - underlies market prices. In his book, "After A Crash: Bear Market Money Making", 'Uncle' Harry Schultz describes some of the effects of the 21 bear markets seen between 1900 and 1987. He describes the index as losing between 13.9% and 90% in the different downward periods. Clearly, adding these losses together totals an enormous amount of money. He also points out that these losses are for the index. Some stocks will have moved very differetly to the average producing many differing results for individuals. In addition, the index only tracks the biggest 'blue chip' companies. These firms are likely to have lost far less value than their smaller counterparts. He adds that, "As a loose rule of thumb, you can say that historically most stocks lose half their value in the average bear market". In other words, the damage that can be done to an individual portfolio is very significant.
In contrast, other bear markets have ravaged economies. Sticking with the United States stock market for examples, the Great Depression which begun in 1929 saw massive losses in the market. By 8th July 1932, the index was down a massive 90% from it's all time high and stood at just 41. In fact, according to S&P's figures, the market fell so hard and the impact was so deep, that in the period of 1924-49 the annual rate of growth was only 1.5%. It wasn't until the early 1950s that the heights of 1929 were rescaled. Obviously, short-term recessions do not have the same impact, and there is some correlation between the length and depth of a recession and the impact on market values and prices. Does Supply And Demand Influence Or Cause A Bear Market? Since short supply and increasing demand can send a stock soaring upwards, it follows that the opposite can be true as well. It is vital to remember that at the core of this discussion is human nature. The nature of the business cycle is one of evolving markets. At times, that evolution can be pushed too far, too fast. At other times, the reigns are pulled in and previous gains can be clawed back. Supply and demand can only describe and explain so much though. There must be, and is, more to it. The underlying cause of any bear market is an overvaluation in stocks relative to their value. As you may have seen from other parts of this site, companies - and by definition, their stock - can be valued in a number of ways. These relate to earnings, cash flow, profitability and much more.
This combination of holders willing to sell and buyers unwilling to pay the high prices creates an inbalance in the overall supply and demand of company stock. When multiplied across an entire sector or market - the effects can be devastating. Hopefully, this goes some way to answering the question posed, "What is a bear market?" To read more about bull and bear markets, please also visit:
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