What it means
The label describes a directional view rather than a strategy. Someone who is bearish believes an asset, a sector or a whole market is heading down, and may act on that by selling holdings, moving into cash, buying protective options or selling short.
The 20% threshold that separates a bear market from an ordinary correction is a convention rather than a law of nature. A fall of around 10% is usually called a correction, and the deeper level is used because it tends to coincide with a genuine change in economic conditions rather than short-term nerves.
The reason this matters outside the investing world is that bear markets change corporate behaviour. Raising equity becomes expensive or impossible, acquisition multiples fall, share-based pay loses its motivating power and boards shift from growth spending to cash preservation.
The uncomfortable arithmetic of a decline is that losses and recoveries are not symmetrical. A 20% fall requires a 25% rise to get back to where you started, and a 50% fall requires a 100% rise, which is why avoiding large drawdowns matters more than capturing the last part of a rally.
A useful nuance is that being bearish is not the same as being pessimistic about a company's business. An investor can admire a company enormously and still be bearish on its shares because the price already assumes more growth than seems achievable.
In practice
Real-world examples.
Example
A pension trustee reviewing a scheme after the index has fallen 22% from its peak decides not to sell, because the scheme has 20 years of liabilities ahead and crystallising the loss would remove any chance of participating in the recovery.
Example
An analyst publishes a bearish note on a grocery chain trading at 28 times earnings, arguing that the price assumes margin expansion the sector has never delivered. She is positive about the management team and negative about the share price at the same time.
Example
A technology company that planned to raise $50,000,000 in a bear market shelves the fundraising, cuts hiring plans by a third and extends its cash runway from 14 months to 26 months instead of accepting a valuation half of last year's.
Formula
Calculation
Decline from peak = (peak value - current value) / peak value, and the recovery required = (peak value - current value) / current value. Suppose a share index peaks at 5,000 and then falls to 3,900. The decline is (5,000 - 3,900) / 5,000 = 1,100 / 5,000 = 22.0%, which is past the 20% threshold and so qualifies as a bear market rather than a correction. To return to the old peak, the index must rise (5,000 - 3,900) / 3,900 = 1,100 / 3,900 = 28.2%, noticeably more than the 22.0% it fell. For an investor holding $500,000 tracking that index, the portfolio falls to $500,000 x 0.78 = $390,000, a paper loss of $110,000 that needs a 28.2% gain to erase.Case study
Seen in the real world.
The following is an illustrative and fictional example. Fernwood Robotics, an invented listed automation business, had grown by raising fresh equity roughly every 18 months, funding losses with investor money on the assumption that the window would always be open.
In the illustrative scenario, the market fell 24% from its peak over five months and the window shut. Fernwood had 11 months of cash, a business plan that assumed a raise in month nine and a share price down 55%, which meant issuing shares would have handed away a third of the company. The board cut discretionary spending by $9,000,000, delayed two product launches and negotiated a debt facility instead.
The fictional company survived and later raised equity at a far better price once conditions improved. The point of the illustration is that a bear market is a financing event as much as a market event, and the businesses that come through it are usually the ones that never depended on the window staying open.
Watch out
Common mistakes.
- Treating every dip as a bear market, when a fall of around 10% is a correction and the conventional bear threshold is a decline of 20% or more from the peak.
- Assuming a percentage fall is undone by an equal percentage rise, when a 20% decline needs a 25% gain and a 50% decline needs a 100% gain to recover.
- Confusing a bearish view on a share price with a negative view of the underlying business, when the two are separate judgements about value and price.
Questions
People also ask.
How long do bear markets usually last?
There is no fixed length, but historically they have tended to be considerably shorter than the bull markets between them, which is one argument against trying to time an exit and a re-entry.
Is being bearish the same as short selling?
No, because bearishness is an opinion while short selling is one way of acting on it, and most bearish investors simply hold more cash or reduce their exposure instead.
What should a business do when a bear market starts?
Extend the cash runway, review any financing that falls due within two years, revisit growth assumptions in the budget and check whether share-based pay still retains the people it was designed to retain.
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