Bear Market

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: Bear market is the term for a sustained decline in which a major stock index or individual security falls 20% or more from its recent high, typically amid widespread pessimism. The opposite is a bull market.

How a bear market works

The 20% threshold is a convention rather than a formal rule, but it is widely used by financial media and analysts. A drop of 10% to 20% is usually called a correction; a fall beyond 20% that persists is labeled a bear market. The term can apply to a broad index such as the S&P 500, a sector, or a single stock.

Bear markets are characterized by lower highs and lower lows, falling investor confidence, and frequently rising volatility. They often coincide with or anticipate an economic recession, though not every bear market is accompanied by one.

Common causes of bear markets

  • Economic slowdown: falling corporate earnings and rising unemployment reduce what investors are willing to pay for stocks.
  • Rising interest rates or inflation: higher rates make bonds more attractive and reduce the present value of future profits.
  • Asset bubbles bursting: excessive valuations in a sector or market can unwind sharply.
  • Financial or geopolitical shocks: banking crises, pandemics, or wars can trigger rapid selling.

Example: identifying a bear market

Suppose a hypothetical index peaks at 5,000. Over the following months it falls to 4,400, a 12% decline, which counts as a correction. It continues lower to 3,900, which is 22% below the peak, meeting the bear market definition. If the index later bottoms at 3,600, the full decline is 28%.

Along the way, sharp bear market rallies are common. A jump from 3,900 to 4,250 is a 9% gain, but if the index then makes a new low, that rally was a countertrend move rather than the start of a new bull market. Many analysts date the end of a bear market only after the index rises 20% from its low.

Bear markets also tend to change investor behavior. Trading volume often rises during the sharpest declines, and correlations between stocks typically increase, so diversification across individual stocks provides less protection than it does in calmer periods. Diversifying across asset classes, such as holding high-quality bonds or cash alongside stocks, has historically been a more effective cushion, though no allocation is guaranteed to avoid losses.

How investors approach bear markets

Strategies vary with goals and time horizon. Long-term investors often continue regular contributions and rebalance their portfolio, buying at lower prices. Others shift toward defensive sectors such as utilities and consumer staples, or toward bonds. Some traders use put options or short positions to hedge. Selling in a panic can lock in losses, but holding risky concentrated positions can magnify them; there is no single correct response.

Frequently asked questions

How long do bear markets last?

Duration varies widely. Some have lasted a few months while others have stretched over more than a year, and the length depends on the underlying economic causes.

What is the difference between a correction and a bear market?

A correction is generally a decline of 10% to 20% from a recent high, while a bear market is a decline of 20% or more.

Should I sell stocks in a bear market?

That depends on your goals, time horizon, and risk tolerance. Many long-term investors stay invested and rebalance, while others reduce risk; this is a personal decision, not one with a universal answer.

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For information only, not investment advice. See the disclaimer.