Bear Market in the Stock Market Explained: From Signal Recognition to Response Strategies

Bull and bear markets are like the market’s breathing, alternating throughout the long course of financial history. Investors are often full of expectations for bull markets but find themselves at a loss in the face of bear markets. But true investment wisdom lies precisely in understanding the essence of bear markets, recognizing the signals of their arrival, and formulating scientific response strategies.

Meaning of Bear Market: Systematic decline of over 20%

A bear market (Bear Market) refers to a market condition where the price of a certain asset drops 20% or more from recent highs. This is not short-term volatility but a sustained downward trend lasting several months or even years.

In contrast, a market correction only refers to a short-term adjustment where stock prices fall 10%-20%. The fundamental difference is that when stock prices rebound more than 20% from lows, it signals the arrival of a bull market.

It is worth noting that bear markets are not limited to the stock market. They can also describe downward cycles in bonds, real estate, precious metals, commodities, exchange rates, and even cryptocurrencies. This is a common phenomenon in capital markets, not an exclusive concept for a particular asset.

5 Major Signals Before a Bear Market

Signal 1: Severe asset bubbles accumulate

Before every major bear market, asset prices are seriously detached from fundamentals. Investors exhibit irrational enthusiasm, frantically chasing concept stocks lacking real profits. When bubbles can no longer expand and the bagholders start to drift away, the market suddenly turns hostile, triggering a stampede-like decline.

Signal 2: Market confidence begins to erode

This is a subtle psychological turning point. When consumers worry about economic prospects, they increase savings and cut back on spending; companies, due to declining revenue expectations, freeze hiring and expansion plans; institutional investors see signs of corporate profit decline and start withdrawing funds. These three forces act together, often causing stock prices to plummet in the short term.

Signal 3: Central banks tighten monetary policy

Tightening measures such as the Federal Reserve (Fed) raising interest rates and shrinking its balance sheet directly reduce liquidity. As interest rates rise and financing costs increase, the willingness of enterprises and consumers to spend decreases, and the stock market loses its “easy money” support, beginning to adjust.

Signal 4: Major geopolitical or financial risks emerge

Black swan events like bank failures, sovereign debt crises, regional conflicts, energy crises can instantly destroy market confidence. The Russia-Ukraine conflict pushed energy prices higher, trade frictions hit supply chains… These external shocks often serve as triggers for bear markets.

Signal 5: Economic data deteriorates

Slowing GDP growth, rising unemployment, and stagflation (inflation combined with recession) often lead market tops 3-6 months in advance. When these data start to worsen, a bear market is already on its way.

Historical perspective: Cycles and magnitude of bear markets

Based on 140 years of data from the S&P 500 index, the US stock market has experienced 19 bear markets. On average, bear markets last about 289 days, with an average decline of 37.3%.

The average recovery period after previous bear markets exceeds 2 years. In other words, after significant declines, investors need a considerable amount of time to reach new highs. The bear market triggered by the COVID-19 pandemic in 2020 lasted only 1 month, an exceptional case in history; whereas the bear market caused by the 1973-1974 oil crisis lasted 21 months, with the S&P 500 falling 48%, making it one of the most severe systemic collapses in recent times.

Deep review of recent US stock bear markets

2022 Bear Market: Balance sheet reduction + geopolitical conflicts + supply chain crisis

Post-pandemic, global central banks flooded the markets with liquidity, leading to runaway inflation. In early 2022, the Russia-Ukraine war broke out, causing food and oil prices to soar, further intensifying inflationary pressures. The Fed was forced to sharply raise interest rates and shrink its balance sheet, causing market confidence to collapse. The biggest declines were in tech stocks that had surged most in the previous two years. This bear market is expected to last across multiple quarters.

2020 Pandemic Bear Market: Fastest recovery

The COVID-19 pandemic triggered global panic from February 2020. The Dow Jones fell from 29,568 on February 12 to 18,213 on March 23, a decline of over 30%. But, learning from the 2008 financial crisis, global central banks quickly launched QE to stabilize liquidity. In just 14 days (by March 26 close at 22,552), the Dow rebounded 20%, exiting the bear market. This also sparked a super bull market over the next two years.

2008 Financial Crisis: The deepest wound

From October 9, 2007, when the Dow was at 14,164.43, to March 6, 2009, at 6,544.44, the Dow fell by 53.4%. The crisis stemmed from the housing bubble and leverage risks in the banking system. Banks packaged risky loans into financial products and sold them layer after layer until housing prices peaked, and rising interest rates caused the housing market to collapse, triggering a chain reaction. The stock market did not bottom out until after the 2009 economic stimulus, only regaining the 2007 high on March 5, 2013. The entire cycle lasted over 5 years.

2000 Dot-com Bubble: The end of concept stocks

In the 1990s, the internet boom led to many high-tech companies going public with “high valuation, zero profits.” When market sentiment reversed, a stampede ensued. This bear market ended the longest bull run in US history and triggered the 2001 recession. The impact was worsened by the September 11 attacks that same year.

1987 Black Monday: A warning of algorithmic risks

On October 19, 1987, the Dow plunged 22.62%, setting a single-day decline record. At the time, the Fed was raising interest rates, tensions in the Middle East were high, and program trading’s stop-loss mechanisms amplified the decline. Fortunately, the government learned from the 1929 Great Depression, quickly implementing stabilization measures (cutting rates, circuit breakers), and markets recovered to previous highs within 1 year and 4 months. This crisis also demonstrated the value of improved market systems.

1973-1974: Stagflation’s strangulation

After the Fourth Middle East War, OPEC imposed an oil embargo on the West, causing oil prices to soar from $3 to $12 per barrel (a 300% increase) within six months. Coupled with the US’s existing 8% inflation, the market fell into a stagflation trap: in 1974, GDP shrank by 4.7%, while inflation reached 12.3%. The S&P 500 declined by 48%, and the Dow was halved, with the bear market lasting 21 months. Even with subsequent rate hikes by the Fed, the economy recovered very slowly.

Practical investment guide for bear markets

Strategy 1: Strict risk control and leverage reduction

The primary task in a bear market is to protect principal. Keep sufficient cash to handle volatility, avoid excessive leverage. Focus on reducing holdings in stocks with extremely high P/E ratios or overhyped valuations—they tend to rise sharply in bull markets but fall the deepest in bear markets.

Strategy 2: Select resilient and oversold quality stocks

To seek opportunities during bear markets, focus on:

Anti-cyclical sectors: Healthcare, consumer staples, etc., which maintain demand during economic downturns and are relatively resilient.

Oversold quality stocks: Companies with solid fundamentals and strong competitiveness that have been unfairly punished in the bear market. Refer to historical P/E ranges, and start building positions gradually at low levels. But only if these companies have sufficient competitive moats to rebound quickly after market recovery.

For investors unsure about individual stocks, broad market ETFs are a safer choice, patiently waiting for the next cycle of prosperity.

Strategy 3: Learn to short sell and seize bear market opportunities

Bear markets have a high probability of decline, so short selling has a higher success rate. Some mature financial instruments can help investors profit from falling markets, but this requires a thorough understanding of risk management. Regardless of the tools used, strict stop-loss and take-profit discipline are the foundation of asset protection.

Recognizing bear market rebounds and avoiding “traps”

During a bear market downtrend, occasional rebounds lasting days or even weeks may occur. These are called “bear market rallies” or “bear traps”, and can easily mislead investors into thinking a bull market has arrived.

Typically, a rise of over 5% can be considered a rebound. But unless the rebound lasts for months and exceeds 20% above the bear market lows, it should be regarded as a rally rather than a reversal. The criteria include:

• 90% of stocks trading above their 10-day moving average
• More than 50% of stocks advancing
• Over 55% of stocks hitting new highs within 20 days

When these indicators appear simultaneously, it can be preliminarily judged that a new upward cycle has begun.

Summary

A bear market is not only a price decline but a comprehensive reflection of market psychology, economic fundamentals, and policy environment. Understanding the essence of the meaning of bear markets is the first step for investors to stay away from panic and seize opportunities.

Investors should learn to identify signals of bear markets promptly and adhere to risk management principles during them. Avoid blind pessimism that causes missed bottom opportunities, or excessive optimism that leads to high-position buying. Adjust your mindset, stay patient, and follow strict discipline—this is the key to navigating bear cycles. Both bull and bear markets present opportunities; the crucial factor is whether you are well prepared.