The bear market of 2008 and early 2009 has been extremely ugly, in fact it has been one of the worst of all time. Not all bear markets are equal in how painful they are, but typically bear markets have several major characteristics that define them. Here is a look at the top five characteristics that make a bear market.
1. Economic contraction or slowing- Most generally in a bear market the economy is contracting, but sometimes it is simply slowing quite drastically from what it had been. The worse the economy is doing the deeper the bear market. After all, stocks and the stock market as a whole have to follow the economy in the long run. Jobless rates are on the increase and consumer confidence slows, which leads to an overall slowing of the economy.
2. Uncertainty is high- Quite possibly the biggest enemy of the bulls is uncertainty. The stock market absolutely hates uncertainty. In fact, the stock market has proven time and again that it can handle bad news much better than it can handle not knowing what the news will be. When the market doesn’t know what is going on and exactly what will be happening in the near future, it is ripe territory for a bear market.
3. Fear is high- A bear market, especially one that is driven by an economic recession, brings lots of fear with it. Fear is what sends the stock market into a quick downward spiral and leads ultimately to capitulation and everyone losing hope that stocks will ever move higher.
4. Trust in the system is low- This one isn’t always present in a bear market, but if it is then things are liable to get very ugly. The single best example I can give of this is the current bear market from late 2007 to early 2009. Investors and average Americans don’t trust the financial system and the government because of all the promises that have been made that didn’t come to fruition. Stock scandals, corporate greed, and poor government programs lead to this. Low trust in the overall system is nearly impossible to overcome.
5. Broad based selling pressure- In a true bear market investors sell just about every stock possible to get to a safer asset class. Even stocks of companies that are doing just fine will suffer because they are a stock and they are able to be sold. The term “throwing the baby out with the bath water” comes from this kind of selling in the stock market.
These five signs are pretty strong indicators of a bear market. Keep your eyes open and watch for these things to start to go away to see the end of the bear market.