Bear Market Investing: Why Now Could Be the Best Time to Buy Stocks

•  trendspotteam

•  Apr 09 2023
 

Although the first quarter of Wall Street performed exceptionally well, marking the best since 2020, it does not necessarily indicate the conclusion of the bear market that commenced in the past year. However, historical data suggests that a prolonged phase of gains could follow. Despite that, it's worth noting that the bear market could still persist for several years. In light of this, it's essential to understand the definition of a bear market and identify suitable investment options.

So, what constitutes a bear market, and where are the recommended investment avenues?

Understanding the Definitions of Bear and Bull Markets

According to the official definition, a bear market occurs when a major index drops by over 20% from its recent peak. Conversely, a decline of over 10% from the peak is referred to as a correction. The counterpart to a bear market is a bull market, where the index rises by 20% or more from the previous low point, signifying a positive market trend.

To put it simply, when there is a significant drop in the market, it is referred to as a bearish trend, and when it rises rapidly, it is called a bullish trend. The terms are thought to have originated from the physical actions of a bull and bear when they confront their opponents: a bull lifts its horns upward while a bear lowers its head.

Historical data indicates that a bull market following a bear market can extend for numerous years. A case in point is the S&P 500, which surged by more than 400% between 2009 and 2020. Prior to that, the bull market that commenced in 2002 lasted for five years, resulting in a gain of over 100%. Furthermore, the market upswing that began in 1990 persisted for ten years, delivering a return of over 400% to investors.

Notwithstanding this, there is an exception to this trend, as indicated by a recent shift to a bull market. At the conclusion of a successful quarter, the Nasdaq 100, comprised of the 100 most prominent companies in the index, recorded a surge of more than 20% from its lowest point on December 28. This marks the first time in almost three years that the index has entered into a bullish phase.

Is a Recession Always Signaled by a Bear Market?

For example, in the recession of 2001-2002 the market dropped by 50%, a similar rate drop was also in 2008-2009, and in Corona the drop was around 30%, but it was very short because they poured a lot of money to 'put out the fire' and it helped at the time , and later the vaccine also arrived.

During 2001, the stock market was hit by a crisis triggered by the dot-com bubble burst and the September 11 attacks, leading to market declines. Despite the recession coming to an end towards the end of that year, the bear market persisted for more than two years, even after the recession had passed. This was attributed to a crisis of trust among investors, caused by a series of significant frauds, such as the collapse of Enron and Worldcom, which worsened the situation.

It is possible for a bear market to transpire in the absence of a recession. In such instances, the downturns tend to be less severe and the bear market is typically shorter. However, if a recession accompanies the bear market, the scenario changes significantly. The bear market may persist for a longer duration and experience deeper declines, with little chance of a swift upward correction.

Understanding the Transition from a Bear to Bull Market

The technical definition of a shift from a bear market to a bull market is a surge of 20% or above from the market's trough. Nevertheless, the actual appearance of this transition may differ during each crisis. The only uncertain factor is the recovery type - it could be a V-shaped rebound, characterized by a sharp drop and swift upturn like during the COVID-19 outbreak, or a more gradual ascent.

Historically, bear markets have lasted anywhere from slightly over a month to several years. For instance, the bear market during the COVID-19 pandemic persisted for approximately five weeks, whereas the bear market during the dot-com crisis at the turn of the century spanned almost three years.

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Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.

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