How to respond when a bear market arrives? Understanding the characteristics of a bear market and investment strategies is the key

In any market, price fluctuations occur cyclically like tides. A prosperous bull market is certainly exciting, but the true test of investors’ wisdom often comes during the downturn of a bear market. Instead of panicking, it’s better to deeply understand the nature and characteristics of a bear market so that you can find opportunities during the downward cycle.

What is a Bear Market? The Core Definition of Bear Market Characteristics

The most straightforward definition of a bear market (Bear Market) is: the price of the asset drops more than 20% from its high. This 20% threshold applies to the S&P 500, Nasdaq, cryptocurrencies, or other assets. When this downward trend persists for months or even years, it forms a systemic downturn.

The U.S. stock market in 2022 is a typical example. The Dow Jones Industrial Average fell from its high of 36,952.65 on January 5, 2022, to below 29,562.12 intraday on September 23, and closed at 29,260.81 on September 26, officially entering the bear market zone.

Conversely, when prices rebound more than 20% from a low point, it enters a bull market (Bull Market). It’s worth noting that the concept of a bear market applies to all tradable assets—stocks, bonds, real estate, commodities, forex, and even cryptocurrencies follow the same logical definition.

Bear Market Characteristics: How to Judge if the Market Has Turned?

Core Characteristic One: Price Decline and Time Cycle

According to the U.S. Securities and Exchange Commission, when most stock indices decline 20% or more within two months, the market officially enters a bear market. Looking at the historical data of the S&P 500, in 19 bear markets over the past 140 years, the average decline was 37.3%, with an average duration of 289 days.

However, bear market cycles vary greatly. The COVID-19 pandemic bear market in 2020 lasted only 1 month, from the high of 29,568 on February 12 to the low of 18,213 on March 23, rebounding 20% in just 42 days and exiting the bear market. In contrast, the 2008 financial crisis bear market lasted over 5 years, with a decline of 53.4%.

Core Characteristic Two: Signs of Economic Fundamentals Recession

A bear market is rarely an isolated phenomenon; it is usually accompanied by economic recession, rising unemployment, and deflation. Central banks facing these pressures often initiate quantitative easing to rescue the market. But historical experience shows that the rallies before QE officially begins are just bear market rebounds, not true exits from the downturn.

Core Characteristic Three: Asset Bubble Accumulation

When current asset prices deviate significantly from their intrinsic value, and market participants exhibit irrational investment enthusiasm, a bear market is often unavoidable. Central banks tighten liquidity to curb inflation, leading the market into a phase of decline.

What Are the Triggers of a Bear Market?

The formation of a bear market is often intertwined with multiple factors:

Market Confidence Collapse — When economic outlooks are pessimistic, consumers reduce discretionary spending, companies cut hiring and expansion plans, and investors collectively sell assets, creating a short-term sharp drop in stock prices.

Excessive Price Bubbles — When asset prices are driven up to unsustainable levels and start to fall, triggering a stampede effect, accelerating the decline and shattering market confidence.

Financial or Geopolitical Shocks — Major events like bank failures, sovereign debt crises, regional conflicts can directly trigger market panic. The Russia-Ukraine war pushing energy prices higher, and U.S.-China trade frictions hurting corporate profits are clear examples.

Tightening Monetary Policy — Federal Reserve rate hikes, balance sheet reductions, and similar measures directly reduce liquidity, suppress corporate and consumer spending, and thus depress asset prices.

External Shocks — Natural disasters, pandemics, or energy crises can lead to global market crashes. The COVID-19 pandemic in 2020 is a typical example.

Historical Review of Bear Markets: Lessons from 1973 to 2022

1973-1974 Oil Crisis: Systemic Collapse During Stagflation

After the Fourth Middle East War, OPEC implemented an oil embargo, causing oil prices to soar from $3 to $12 per barrel within six months (a 300% increase). This exacerbated the existing 8% inflation in the U.S., leading to stagflation—GDP fell by 4.7%, but inflation reached 12.3%. The S&P 500 declined by 48%, the Dow was halved, and the bear market lasted 21 months, making it one of the deepest systemic collapses in modern U.S. stock history.

1987 Black Monday: The Market Learned How to Save Itself

On October 19, 1987, Black Monday, the Dow Jones Industrial Average plummeted 22.62%. The government learned lessons from the 1929 Great Depression and quickly announced stabilization measures, including interest rate cuts and circuit breakers. The market took only 1 year and 4 months to recover to its previous high, demonstrating that the market had learned how to digest bearish information.

2000 Dot-com Bubble: The Illusion of Concept Stocks

During the 1990s tech boom, many high-tech companies went public, but most lacked real profits and relied on hype. When funds withdrew, a stampede effect followed. This bubble burst ended the longest bull market in U.S. history and triggered an economic recession.

2008 Financial Crisis: The True Portrait of a Five-Year Deep Winter

The mortgage crisis evolved into a global financial storm. The Dow fell from 14,164.43 to 6,544.44 points, a decline of 53.4%. It wasn’t until March 5, 2013, that it recovered to the 2007 high, with the bear market lasting over 5 years, making it one of the most severe systemic crises in modern times.

2020 Pandemic Shock: Immediate Rescue by Global Central Banks

The COVID-19 pandemic triggered global panic. The Dow peaked at 29,568 on February 12 and fell to a low of 18,213 on March 23. But global central banks learned from 2008 and immediately launched QE to stabilize liquidity. On March 26, the Dow closed at 22,552, exiting the bear market in just 6 weeks. This was followed by two years of a super bull market.

2022 Bear Market: Rate Hikes, War, and Supply Chain Chaos

Post-pandemic, global central banks engaged in aggressive QE, causing inflation to soar. In 2022, the Russia-Ukraine war pushed up commodity prices, and the Fed sharply raised interest rates and shrank its balance sheet, heavily impacting tech stocks. This bear market reflects deep policy adjustment shocks, with market expectations that it will last into 2023.

Investment Strategies in a Bear Market: How to Survive and Profit During Downturns?

Strategy One: Reduce Risks and Preserve Capital

Maintain sufficient cash reserves during a bear market, avoid excessive leverage. Especially reduce investments in assets with high “price-to-earnings” ratios and high valuations—these stocks tend to rise sharply in bull markets but fall even harder in bear markets.

Strategy Two: Seek Safe Havens and Undervalued Assets

Besides holding cash, focus on assets less affected by economic cycles, such as healthcare stocks. Also pay attention to high-quality stocks with strong moat that have fallen significantly—buy in stages when their P/E ratios are at low levels based on historical ranges. These stocks must have enough competitive advantage to sustain for over 3 years; otherwise, they may not recover to previous highs when the market rebounds.

If confidence in individual stocks is uncertain, investing in broad market ETFs for the next recovery cycle is a safer approach.

Strategy Three: Use Financial Instruments to Capture Downside Opportunities

Bear markets have high probability of decline, and short-selling success rates increase accordingly. Derivatives like Contracts for Difference (CFDs) can be used for short trading, covering indices, forex, futures, stocks, and commodities. Many trading platforms offer demo accounts to familiarize investors with operations before actual trading.

Bear Market Rebounds and Traps: How to Distinguish True Signals from False?

A bear market rebound (bear trap) refers to a short-term rally within a downtrend, lasting days or even weeks. An increase of more than 5% can be considered a rebound. This type of movement can mislead investors into thinking a bull market has started, but unless there are continuous months of gains or a rebound exceeding 20% that exits the bear market, it’s still considered a rebound.

How to identify the true start of a bull market?

Observe the following indicators:

1. 90% of stocks trading above their 10-day moving average
2. More than 50% of stocks are rising
3. Over 55% of stocks hit new highs within 20 days

When these conditions are met, it confirms that the bear market has truly ended and a new bull market has begun.

Summary: Bear Markets Are Not Disasters, but Opportunities for Reallocation

The arrival of a bear market is not terrifying; the key is to judge its beginning in time and adopt appropriate investment tools to respond. Investors can protect assets while creating opportunities through short-selling and other strategies. Adjusting mindset and seizing opportunities, both long and short positions can be profitable.

For conservative investors, the most important thing during a bear market is to stay patient and strictly implement stop-loss and take-profit rules, effectively protecting assets. Bear markets have clear characteristics—learning to recognize and develop corresponding strategies can turn passive endurance into active offense.