Bearish Market

A bearish market trend refers to an expected downward movement in the prices of securities, assets, currencies, investment instruments, or commodities. In a bear market, investors expect stock prices to drop by 20% or more. The economic slump also presents a buying opportunity for investors.

Falling markets are called “bearish" because the movement in stock prices resembles the attacking pattern of a bear. A bear uses its paws to slap down on its prey. A bearish market can adversely affect the economy. It results in stock market crashes, business stagnation, reduction in job opportunities, and ultimately layoffs.

Key Takeaways                                                               

• The term "bearish market" refers to an investor viewpoint that the particular stock security, commodity, asset, currency, or the entire market will go down in value. The fall in stock prices is 20% or more.
• It is a pessimistic approach —investors speculate about a negative movement in stock prices and take a short position to benefit from it.
• The bear market comprises four stages—recognition, panic, stabilization, and anticipation.

In a bearish market, investors expect a particular stock, instrument, or even the whole stock market to go down in value. If the prediction is successful, investors make a lot of money. However, if this speculative position ends up being wrong, it may cause massive losses. Bear markets result in economic collapse —markets go down, businesses stagnate, and many lose their jobs.

Some investors profit from such scenarios. They consider it the right time to buy stocks and instruments—available at a relatively lower price. When the market bounces back, they sell it off.

A bearish view promotes market efficiency— it facilitates short trades on overvalued securities that the market presumes overvalued, thus reflecting investor and market sentiment. But, due to losses caused by the stock market decline, this viewpoint is considered negative.

The bear market condition is divided into four phases:

1. Recognition: At this stage, only some investors foresee a downward market trend. Others fail to realize a bearish trend at this point. 
2. Panic: This is an alarming phase where the stock prices start falling—investors avoid short-term trading. It leaves a negative impact on investors and the economy.
3. Stabilization: At this point, investors figure out the cause behind falling prices. Yet, there is a lot of confusion among investors—stock prices move up and down aggressively. This stage can extend for months and is seen as the longest period in a bear market.
4. Anticipation: Finally, stock prices start rising—the market seems to recover. There is a consistent improvement in the stock prices and economic conditions.

In March 2022, the NASDAQ Composite (NASDAQ 100 Index) showed a bearish movement. The index comprises technology giants like Apple Inc., Microsoft Corp., Amazon.com Inc., and Alphabet Inc. 

The index fell by 21% from the highest value in November 2019 (inflation). The economic slump was brought out by the war between Russia and Ukraine. Due to falling stock prices, the listed companies reported a loss of $3.1 trillion in market cap. However, it is also seen as an opportunity for the investors—to buy low.

The following list comprises bear market scenarios in the US:

Just before the 2007 stock market crash, many hedge fund managers took short position on the housing market and mortgage-backed securities—they feared a fall in value. Due to their bearish view, they gained from the housing market's catastrophic collapse.

In a failing market, the following strategies are applied:

• A long-term perspective is recommended. Investments should be made for an extended period if the market doesn't perform as desired.
• To mitigate risks, investors can adopt the dollar-cost averaging—by investing fixed amounts at regular intervals throughout the bearish period.
• Investors must pick assets or securities that have shown stable performances even during economic downturns.
• The best way to diversify the risk is to add fixed income securities to the portfolio.

The differences between a bearish and bullish perspective are as follows: