Equities
Bear Market
Reviewed
Bear Market formula
Decline from peak = index level ÷ prior peak − 1 (a bear market is commonly −20% or worse)
A bear market is a period when stock prices are declining and market sentiment is pessimistic, generally defined as a fall of 20% or more in a broad market index over at least a two-month period.
How a bear market is defined
The SEC's Investor.gov glossary defines a bear market as a time when stock prices are declining and market sentiment is pessimistic, adding that a bear market generally occurs when a broad market index falls by 20% or more over at least a two-month period. The 20% figure is measured from the index's closing high, and smaller declines are usually called corrections (about 10% to 20%) or pullbacks (under 10%). The label refers to broad indexes such as the S&P 500 rather than individual stocks or sectors, which routinely fall 20% on their own. Bear markets are confirmed only after the threshold is crossed, so by the time one is declared much of the decline has already occurred, and the eventual bottom is known only in hindsight when a subsequent 20% rise marks the start of a new bull market.
Hypothetical example: an index peaks at 5,000, so a close at or below 4,000 meets the convention. If it bottoms at 3,500, a 30% decline, regaining the old high requires about 43%. See the 
drawdown recovery calculator and drawdown.
Why bear markets test investors
Losses and gains are not symmetric: a 20% loss requires a 25% gain to recover, a 30% loss requires about 43%, and a 50% loss requires 100%. That arithmetic, and the tendency of volatility to rise during declines, is why investors most often abandon plans in bear markets. The SEC's asset allocation guidance notes that large-company stocks as a group have lost money on average about one out of every three years, while investors who held through volatile periods over long horizons have generally seen strong positive returns; a bear market is the period in which that trade-off is felt most directly. Bear markets also reshape portfolios mechanically: as stocks fall, their weight in a mixed portfolio shrinks below target, which is the trigger for rebalancing toward the original asset allocation rather than away from it.
Hypothetical example: a $100,000 portfolio at 60/40 sees stocks fall 30% with bonds flat, leaving $42,000 and $40,000, a stock weight near 51%. Restoring 60% means moving about $7,200 into stocks. See bull market.
Example
Hypothetical: an index that peaks at 5,000 enters a bear market by convention once it closes at 4,000; if it bottoms at 3,500, a 30% fall, it needs a 43% rise to regain the old high.
Bear Market — FAQ
What is Bear Market?
A bear market is a period of falling stock prices and pessimistic sentiment, commonly defined as a decline of 20% or more in a broad market index over at least two months.
Can you give an example of Bear Market?
Hypothetical: an index that peaks at 5,000 enters a bear market by convention once it closes at 4,000; if it bottoms at 3,500, a 30% fall, it needs a 43% rise to regain the old high.
What is the difference between a bear market and a correction?
Both describe declines from a recent high in a broad index. A correction is usually a fall of about 10% to 20%; a bear market is a fall of 20% or more, generally over at least two months. Corrections are more frequent and can occur inside a bull market without ending it.
How long do bear markets last?
There is no fixed duration. By convention a bear market runs from the prior closing high until the low from which the index next rises 20%. Historical U.S. bear markets have ranged from a few months to more than two years, and the end date is only identifiable after the recovery has begun.
Why does a 20% loss need a 25% gain to recover?
Because the gain is measured from a smaller base. A $100 investment that falls 20% is worth $80; getting back to $100 requires $20 of gain on $80, which is 25%. The larger the drawdown, the larger the required recovery: 30% needs about 43%, and 50% needs 100%.
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