Scary term for all investors, the bear market means a sharp and prolonged decline in stock market prices. And we are right in it.
These are two words that frighten investors: bear market. It is not strictly speaking a bear market: the term designates a particularly unfavorable period for investments, during which stock market prices fall.
The term comes from Wall Street, where traders and bankers were the first to use it, but it is also used by the crypto community, which uses it whenever bitcoin or ethereum prices dive. . And, to according to many observers, this beginning of summer 2022, we are in full bear market.
What happens during a bear market ?
Concretely, a bear market means a decline of more than 20% in values after a previous record. It must be prolonged and is accompanied by pessimistic sentiments and a general loss of investor confidence. The bear markets can last several months, several years, or only a few weeks. Given that bitcoin has lost more than 50% of its value in 6 months and that the Nasdaq has lost 30% since November 2021, there is no longer any doubt: we have indeed entered a bear market.
The origin of the name bear market is debated. For some, the term comes from the movement that bears make when kicking from top to bottom. For others, the name would have been chosen because the bears hibernate in winter, which would make think of the pullback of the markets during times of crisis.
What causes a bear market?
What the bear markets are they due? There are several factors that may come into play. First, the increase in interest rates, which is always news that chills the markets and investors. When these rates are up, it becomes more difficult to borrow and the loans cost more for the individuals or businesses that take them. In general, destabilizing events such as a war, a pandemic (hello Covid-19), or the bursting of a bubble can also lead to a bear market.
In the end, these are not very rare events: the specialized site Investopedia indicates that between 1900 and 2018, the Dow Jones experienced less than 33 bear markets, an average of one every three years. For other indices with a more volatile value, such as cryptocurrencies, it can be even more.
the bull marketthe inverse of bear
There really isn’t a magic formula for getting out of a bear market. The experts simply consider that the period has passed, when prices have priced 20% more than their lowest value reached during the period. They usually wait for the growth to last for several months to declare that the bear market is finished.
But the reverse also exists: it is the bull market. The term refers to periods during which the prices of stocks and cryptocurrencies rise sharply. These bull markets can also last several weeks or months, and they are characterized by strong market confidence and optimistic investors. On average, prices increase by 114% during these periods, compared to an average drop of 36% during the bear markets.
Here too, the origin of the name is debated: the term would designate either the movement of the bull’s horns, from bottom to top, or it would be linked to the fact that bulls charge their opponents… One of the last examples of bull market for cryptocurrencies took place between 2020 and 2021: bitcoin, which had started around $7,000, was trading for more than $66,000 a few months later, breaking its previous record high.