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A bear market is a financial market condition characterized by a prolonged decline in asset prices, typically a drop of 20% or more from recent highs.
A bear market refers to a period in financial markets during which prices of securities, such as stocks, bonds, or indices, fall significantly, typically by 20% or more from recent peaks, and remain pessimistic for an extended time. This trend reflects widespread investor fear or pessimism about economic conditions, earnings, or geopolitical events impacting the market.
Understanding bear markets is vital for investment strategy since these periods often lead to increased volatility and potential capital losses. Wealth managers and family offices may adopt defensive strategies, increase cash holdings, or shift to less volatile asset classes during bear markets to preserve capital. Additionally, bear markets can offer tax-loss harvesting opportunities, improving tax efficiency by realizing losses to offset gains.
If the S&P 500 index falls from 4,500 to 3,500, that represents a decline of approximately 22%, meeting the conventional threshold of a bear market. During this time, a family office might reduce equity exposure by shifting assets into bonds or cash equivalents to limit downside risk.
Bull Market
A bull market is the opposite of a bear market, characterized by sustained rising prices in financial markets and optimistic investor sentiment. While a bear market signals potential downturns, a bull market reflects growth and increasing asset values.
What defines a bear market?
A bear market is traditionally defined as a decline of 20% or more in a market index or asset class from its recent high, sustained over a period of time, usually accompanied by negative investor sentiment.
How long do bear markets typically last?
The duration of bear markets can vary widely—from months to over a year—depending on economic factors, market conditions, and external shocks. Some bear markets are brief corrections, while others coincide with economic recessions.
Should investors sell during a bear market?
Selling during a bear market may lock in losses; instead, investors often aim to maintain strategic allocations, rebalance portfolios, or deploy capital opportunistically, depending on risk tolerance and investment goals.