What Is a Bear Market

A bear market refers to a prolonged period in which stock prices fall significantly, generally by 20% or more from recent highs. It reflects widespread pessimism, slowing economic activity, and reduced investor confidence. Understanding bear markets helps investors recognise patterns in market cycles and prepare for challenges.

Recognising a bear market requires looking beyond short-term volatility and focusing on consistent signals:

• Decline in Stock Indices: A fall of 20% or more in major indices such as Nifty 50 or Sensex.
  

• Duration: The decline sustains for weeks or months rather than being a quick correction.
  

• Economic Indicators: GDP growth slows, unemployment rises, and corporate earnings shrink.
  

• Market Sentiment: Investors turn cautious, trading volumes reduce, and volatility spikes.
  

These indicators together suggest that the market is entering a bear phase.

Bear markets often progress in recognisable stages:

• Early Decline: Stock prices begin to fall gradually as negative economic news spreads.
  

• Acceleration: Selling intensifies and broader market indices record sharper declines.
  

• Panic Stage: Investors rush to exit positions, causing steep price drops and heavy losses.
  

• Stabilisation and Recovery: Eventually, prices settle at lower levels, and gradual recovery starts.

Each phase reflects shifts in investor psychology, from denial to fear and then eventual acceptance. 

Several factors can trigger the onset of a bear market:

• Economic Recession: A contraction in economic growth reduces investor confidence.
  

• High Inflation: Rising prices cut into consumer spending and company profits.
  

• Rising Interest Rates: Increased borrowing costs reduce business and consumer demand.
  

• Global Events: Wars, pandemics, or political instability can disrupt economies.
  

• Market Overvaluation: Stocks priced far above their fundamentals often face corrections.

These triggers, individually or combined, can push the market into a prolonged downturn.

Bear markets are not uniform, and they can be categorised into different types:

• Structural Bear Market: Caused by long-term imbalances, such as excessive debt.
  

• Cyclical Bear Market: Linked to normal business cycles, often lasting months to a few years.
  

• Event-Driven Bear Market: Triggered by sudden events, such as the COVID-19 pandemic.
  

Example: In early 2020, Indian indices such as the Nifty 50 dropped by over 35% in less than two months due to the pandemic shock. This is a clear instance of an event-driven bear market.

A bear market impacts not just stock prices but the broader economy and investor behaviour:

• Investor Losses: Portfolios lose value, reducing individual wealth.
  

• Corporate Earnings Decline: Companies struggle as revenues fall, leading to reduced profits.
  

• Job Cuts: Firms may reduce hiring or lay off employees to manage costs.
  

• Economic Slowdown: Reduced spending and investment slow overall growth.
  

• Psychological Impact: Fear and pessimism dominate, delaying fresh capital inflows.
  

For instance, during the 2008 financial crisis, Sensex dropped by more than 50% in a year, wiping out significant investor wealth and affecting businesses across sectors. 

History shows multiple bear markets, each with its own cause and severity:

• 2008 Global Financial Crisis: Triggered by subprime mortgage collapse, Indian markets fell sharply, with Sensex dropping from ~21,000 to ~9,000.
  

• COVID-19 Crash (2020): The Sensex plunged by over 35% in just weeks as economies shut down worldwide.
  

• Earlier Indian Market Dips: Events like the dot-com bubble (2000) and global oil shocks have also pushed Indian indices into bear phases.
  

These examples highlight how global and domestic triggers can both lead to extended downturns.

A bear market is defined by a prolonged fall of 20% or more in stock prices, usually accompanied by weak economic indicators and low investor confidence. For example, during the 2020 pandemic-driven crash, Sensex lost more than one-third of its value within weeks, shaking markets worldwide. While bear markets create challenges, they also remind investors of the cyclical nature of equity markets. Recognising the signs and understanding the consequences can help in navigating such downturns with greater clarity.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.