Bear Market

A bear market is characterized by falling prices for securities, usually stocks, within a context in which market participants are pessimistic about the chances of an imminent turnaround in prices. A bear market differs from a market correction, even during a correction in which the market index loses twenty percent of its value (the figure typically associated with a bear market). Corrections tend to follow dramatic events where the confidence of investors is shaken very badly for a short period, but where the impression quickly forms that the event is a one-off that should not alter investors' underlying outlook. The responses of North American and European stock markets to both the crash of 1987 and the fallout from the Asian financial crisis in 1997 represent two such cases. On both occasions, following a record points fall in the market index, the underlying increase in stock prices soon returned to its pre-correction trend, amid the general perception among investors that market fundamentals remained sound. A bear market, by contrast, is one in which falling stock prices are not treated as a symptom of a one-off shock to the financial system, nor as evidence of temporary poor performances by the companies in question, but as a function of depressed expectations across the market as a whole. Bear markets therefore tend to be more protracted than market corrections, requiring a wholesale change in the confidence of market participants before they are brought to a conclusion. The most notable worldwide peacetime bear markets of the last one hundred years occurred (1) during the depression of the 1930s, (2) in and around the collapse of the Bretton Woods system in the early 1970s, and (3) following the bursting of the tech-stock bubble in 2000.

Public policymakers have few policy tools at their disposal to end a bear market (the same is true of a bull market). They can maintain low real rates of interest in an attempt to encourage investors to adopt a more optimistic attitude toward the market, but that is about all they can do. In recent times, however, public policymakers have shown a high degree of inflation aversion and, as such, they may be reluctant to reduce interest rates for fear of introducing inflationary tendencies into the economy. This leaves policymakers with the option of trying to talk the market up, to instill into investors the sense that all is well with the economy and that they should feel confident that they can realize their investment plans. Central bankers in particular are often called on to emphasize sound macroeconomic fundamentals during a bear market. The expertise that they have as central bankers, allied with their perceived autonomy from the political process, is assumed to lend additional authority to their pronouncements. However, one feature typical of bear markets is investors' unwillingness to act based on news about fundamentals, but to act instead because of their experiences of the depressed state of the market around them.