How long does a bear market last? Many new investors wonder, what would it be like if the markets keep escalating or stock prices keep rising. However, this has rarely happened.
We switch off machines and maintain them to ensure smooth functioning. The markets are no different! Financial markets need to reset from record-setting performances. Otherwise, prices balloon and everyone apart from the early investors has to buy shares at overinflated prices.
In this article, we shall look at what bear markets are, what causes them, and How long does a bear market last?
What are bear markets?
A bear market is a situation when markets experience a prolonged decline in prices. The markets are bearish when the prices of securities fall by 20% or more from their recent highs. This happens amid pessimism and negative investor sentiments.
Bear markets are a time of uncertainty for investors. Portfolios are in the red and it gets uncomfortable to watch our holdings fall. However, knowing that there is a light at the end of the tunnel can help.
What causes bear markets?
Some of the common causes of bear markets are:
- the bursting of market bubbles
- public health crises
- geopolitical crises
- slowing economic growth or poor economic data
- contractionary monetary or fiscal policies
How long does a bear market last?
Bear markets happen often and are a part of the economic cycle. However, they indicate a potential economic downturn. Geopolitical risks and the bursting of market bubbles are common causes why markets slip into a bearish phase.
Experts say that each bear market is different and unique. There is no way to say how far the market may drop or for how long it may last. But, bear markets can be beneficial. Many investors make money by investing in inverse ETFs or short-selling stocks.
Bear markets are generally categorized as secular or cyclical. Secular bear markets are driven by forces or influences that cause the price of securities to fall over an extended period, generally years. On the other hand, cyclical bear markets are generally caused by normal market volatility and generally last for a few months.
Stages of bear markets
The stages of a bear market can help us to understand if the bear market might end soon or if it might last for a long time. Usually, bear markets occur in four stages:
Stage 1: Recognition
Investors have a positive sentiment and the prices are high. Investors generally tend to ignore the initial onset of a bear market and mistake it for ordinary day-to-day fluctuations. A few investors realize that it’s a bear marker towards the end of this stage and start selling their securities.
Stage 2: Panic
There is panic in the markets and investors tend to capitulate. Trading volumes drop and economic indicators point to a worsening economy. Investor sentiments drop significantly.
Stage 3: Stabilization
Panic begins to taper off and investors start to digest the reason for the price decline. This stage is usually turbulent and volatile. It lasts the longest out of the other stages. Speculators enter at this stage and there may be rallies that tend to reverse.
Stage 4: Anticipation
Prices begin to level off at this stage and low valuations or good news regarding the securities start attracting investors into purchasing securities.
The history of bear markets in India
Many analysts say that one cannot anticipate how long bear markets last, however, we can look at past data to get an idea. India has gone through four bear markets in the past:
Triggered by the Asian financial crisis and preceded by the Russian debt default. India’s balance sheet was good and was not part of the crisis. However, the crash in the Asian markets had an impact on the Indian markets.
This was followed by the crash in the Russian markets when Russia devalued the Ruble and defaulted on domestic debts and declared a moratorium on payment to foreign creditors.
The bursting of the tech bubble culminated with the terrorist attacks in the US. India witnessed some collateral damage in the software services sector, however, the bear market was US-centric.
This happened due to the global financial crisis. India felt the crisis through its capital account and the stock market was among the worst performers globally. However, Indian banks were unaffected.
The prices of securities suffered deep cuts and more than 99% of the stocks yielded negative returns from January-November 2008. The BSE Smallcap index ended the cycle with a net loss of 41 per cent from its value at the beginning and 80 per cent from the January 2008 value.
The BSE Midcap Index lost 36 per cent from its value at the beginning and 75 per cent from January 2008. Moreover, Sensex lost 18 per cent from its beginning value and 60 per cent from its January 2008 value.
The bear market in 2020 was induced by the effects of the Covid-19 pandemic. The markets dropped by 34.22%. The outbreak of Covid-19 resulted in lockdowns around the world. This led to a huge market crash in the global as well as Indian markets.
Once it was declared a pandemic by the World Health Organization, the Sensex dropped from 42,271 points to 28,288 points within a week. Moreover, it coincided with the Yes Bank crisis, which made the strong BFSI sector lose crucial points.
The stock markets have been bearish in the past for a variety of reasons. They include wars, political instability, banking crises, diseases and more. While the occurrence of bear markets is inherent to the markets, recoveries have also been consistent. It is difficult to guess how long bear markets last, but recognizing the stages can help, especially for long-term investors.
That’s all for this article on How long does a Bear Market last! We hope to see you around and happy investing until next time!
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