What Is a Bear Market, and What Does It Mean for Your Money?

Key Takeaways

• A bear market is a fundamentally driven decline of about 20% or more in a broad stock market index over an extended period
• Bear markets often develop when euphoric investor sentiment collides with weakening economic fundamentals
• Large negative surprises, or “wallops,” can also trigger bear markets, but such events are rare compared to typical market volatility
• Historically, each bear market has been followed by a subsequent bull market, so understanding how to navigate the downturn and remain prepared for the recovery can be critical for long-term investors

Market volatility is a normal part of investing. Stock prices move up and down for any or no reason at all, including changes in economic conditions, corporate earnings expectations and market sentiment. Still, when a major stock market index falls sharply and financial news starts talking about “bear market territory,” even experienced investors can feel uneasy.

Understanding what a bear market is, and what it is not, can help you put a market downturn in context. Instead of reacting to every headline, you can view periods of falling stock prices as part of a longer market cycle and make decisions based on your long-term goals.

In this article, we explain what a bear market is; how it differs from bull markets, market corrections and recessions; what tends to cause bear markets and how they can affect investors. We also outline several guidelines Fisher Investments uses when analyzing bear markets and discuss how a fiduciary investment adviser may help you stay disciplined when markets are volatile.

What Is a Bear Market?

A bear market is a fundamentally driven stock market downturn of 20% or more over an extended period. In a bear market, falling stock prices reflect deteriorating fundamentals, such as weaker earnings or slowing economic growth, rather than short-term swings in market sentiment alone.

The term “bear market” applies to broad stock market indexes that represent large portions of the financial market, not to individual stocks. A single company’s share price or mutual fund can fall 20% for company-specific reasons independent of overall market conditions.

Context also matters. How fast a downturn unfolds and whether it barely crosses the -20% bear market threshold matter. Understanding whether a market trend is driven mainly by sentiment or by fundamentals is another important part of analyzing whether a move is a bear market, a correction or simply normal market volatility.

Bear Markets vs. Bull Markets vs. Market Corrections vs. Recessions

Bear markets are only one part of the broader market cycle. Investors often hear “bear market,” “bull market,” “market correction” and “recession” used together, which can be confusing. Clarifying these terms may help you interpret market conditions more clearly.

What Is a Bull Market?

A bull market is a long period when stock prices generally trend higher, and are often supported by positive fundamentals such as growing corporate earnings, healthy consumer spending and positive economic conditions. Investor confidence usually starts out pessimistic in early bulls and warms throughout the bull’s lifetime, typically ending in euphoria.

Both bull and bear markets are normal parts of the market cycle. Over an investing lifetime, individual investors may experience several of each.

What Is a Market Correction?

A market correction is typically defined as a short, steep, sentiment-driven market downturn of 10% to 20% from a recent high. Corrections often develop quickly, sometimes over days or weeks, and can reverse just as fast. They may be triggered by a negative headline, geopolitical event or temporary shift in market sentiment even when underlying economic conditions remain sound. Some corrections have no easily identifiable cause.

By contrast, a bear market is usually a deeper, more extended market decline rooted in fundamentals.

What Is a Recession?

A recession is a broad economic slowdown, not a market classification. While recessions are often measured using gross domestic product and other economic indicators, they are defined by the health of the real economy rather than the level of a stock market index. In the United States, the National Bureau of Economic Research is the official body that determines whether a recession is underway.

Bear markets and recessions are often related, but they are not the same thing. Stocks are forward-looking and tend to move ahead of the economy. Historically, bear markets have often begun before a recession is officially recognized and ended before economic data has clearly improved. It is also possible to see a bear market without a recession, and recessions without a concurrent bear market.

Using “bear market” and “recession” interchangeably is incorrect and can mislead investors. Relying on official recession calls to guide your investing decisions may mean reacting to economic conditions only after much of the move in stock prices has already occurred.

What Causes a Bear Market?

No two bear markets are identical, but many share similar drivers, such as:

Economic Weakness

In most cases, a bear market develops as economic conditions and corporate fundamentals weaken. Signs often seen during bear markets can include:

• Falling corporate earnings expectations across multiple sectors
• In inverted yield curve and contracting lending environment
• Expectations for falling business investment

When earnings expectations fall broadly, investors may reassess what they are willing to pay for future profits. Lower expected cash flows and increased uncertainty can weigh on stock prices, contributing to a declining market.

Investor Sentiment and Euphoria

Investor sentiment, or the overall mood of investors toward markets, also plays an important role. Late in a bull market, strong investor confidence can turn into euphoria. Investors may come to believe that major stock market indexes will continue rising regardless of fundamentals. Negative data may be ignored or rationalized away.

Euphoria alone does not cause bears but the combination of weakening fundamentals and euphoric sentiment is a common backdrop for bear markets. When expectations become detached from reality, the risk of disappointment rises, which can trigger negative surprise and a deeper market downturn.

Monetary Policy

While only one factor among many, central bank policy can influence both bull and bear markets. When monetary policymakers raise short-term interest rates rapidly or tighten financial conditions, higher borrowing costs can slow economic activity. An inverted yield curve—when short-term interest rates move above long-term rates—while not always an indicator of a recession or bear market, is one example of a monetary environment that has historically preceded some bear markets.

Monetary policy alone does not determine a bear market, but it can affect economic conditions, corporate earnings and investor sentiment in ways that contribute to a market decline.

Major Negative Economic Surprises

Some bear markets begin with a large, unexpected negative event that significantly disrupts global economic growth. Fisher Investments refers to these rare events as “wallops.” To end an otherwise healthy bull market, a wallop generally must be both unexpected and powerful enough to remove several trillion dollars from global output.

Examples could include severe policy errors, major global conflicts or sudden decisions that shut down large parts of the economy. While investors often perceive many different risks as having the potential to create a “wallop”, most do not rise to this level. Instead, they become part of the ongoing wall of worry that markets climb during a bull market.

How Long Do Bear Markets Typically Last?

History suggests that bear markets are temporary phases, not permanent conditions. Using our definition of a fundamentally driven decline of 20% or more, the S&P 500 has experienced 13 bear markets between 1946 and 2022, lasting 14 months on average.

Exhibit 1: S&P 500 Bear Markets 1929 – 2022

Source: FactSet, as of 2/11/2026; S&P 500 Index Price Level, daily, 9/7/1929 – 8/29/2023. Returns are presented exclusive of dividends. For “Duration,” a month equals 30.5 days.

That “average bear market” is a reference point, not a precise forecast. Market conditions, economic cycles and policy responses can all affect how long a specific bear market lasts. Some bear markets are relatively brief, while others last longer.

Just as important, history also shows that each bear market has been followed by a bull market. Over time, bull markets’ cumulative gains have tended to outweigh bear markets’ losses. For long-term investors, missing the early phase of a new bull market, when returns can be particularly strong, may be more damaging than living through the preceding bear market.

How Do Bear Markets Affect Investors?

Beyond the numbers, bear markets can be emotionally challenging. Watching share prices fall and portfolio balances decline can be uncomfortable for investors. Headlines highlighting market downturns, bear market territory and falling stock prices can add to the pressure.

Common reactions may include:

• Selling equities after a large market decline
• Moving heavily into cash or short-term instruments
• Focusing on day-to-day market moves instead of long-term financial goals

Those responses may feel reassuring in the moment, but they can lock in losses and increase the risk of missing a recovery. For many investors, the key question is not how to avoid every market downturn, but how to navigate them in a way that stays consistent with their time horizon, objectives and risk tolerance.

How To Identify a Bear Market

Identifying a bear market while it is still developing is difficult. Over time, however, patterns in fundamentals, market action and sentiment may suggest that a deeper market downturn is under way.

Some factors indicating a potential bear market include:

• Fundamentals: Are corporate earnings, revenue growth and profit margins expected to weaken across many sectors, not just a few companies? Are key forward-looking economic indicators pointing to broader economic stress?
• Market action: Are markets experiencing a slow rolling top with initially shallow declines combined with euphoric sentiment?
• Market sentiment: Are investors dismissing negative fundamentals and focusing only on favorable stories?
• Potential Wallops: Is there evidence of a genuinely large, surprising event unfolding quickly and capable of significantly denting global economic output?

Four Rules for Investing During Bear Markets

Because no two bear markets are exactly alike, there isn’t any single formula for navigating them. However, we have developed four guidelines that help frame how we think about bear markets and market conditions:

• The Two-Percent Rule: In a bear market, stock prices often decline about 2% per month on average. Contrary to popular belief, bear markets don’t often begin with sharp, sudden drops. If there is a steep drop of much more than 2% per month, what you’re experiencing may just be a short-term correction and not a bear market.
• The Three-Month Rule: One of the greatest dangers to investors is the risk of getting out of stocks at the wrong time and missing bull market returns. This rule recommends waiting three months after you believe the market has peaked before going defensive. This provides a window of time to assess fundamental data, market action and possible drivers for the bear. And as discusses in our next rule, still provides plenty of time to avoid large swaths of a bear market’s downside.
• The Two-Thirds/One-Third Rule: Analyzing historical bear markets, we’ve observed that about one-third of bear markets’ decline tends to occur during the first two-thirds of a bear market, and about two-thirds of the decline occurs during the bear’s final third. So it may not be as important to miss the initial drop, as the sharper drops often occur later on in the bear market.
• The 18-Month Rule: Bear markets rarely last longer than two years, so it’s best to not remain out of equity markets longer than 18-months. Waiting too long to reinvest in stocks may increase your risk of missing out on the sharp rebound that usually accompanies the next bull market.

Deciding whether, when and how to “go defensive” in a bear market is a significant decision that should be based on a careful, forward-looking assessment of fundamentals and market sentiment—not on short-term emotions. It is also a tactic that may be appropriate only rarely over an investing lifetime, not a repeated attempt to time every market decline.

How a Fiduciary Investment Adviser Can Help

Understanding what a bear market is, how it differs from a correction or recession and how it fits into the broader market cycle can help investors respond more calmly to volatility. Still, applying that understanding to your own portfolio can be difficult, especially when headlines are negative and markets are moving quickly.

A fiduciary investment adviser can help you:

• Assess whether your current asset allocation is aligned with your goals and risk tolerance
• Interpret economic conditions and market sentiment in the context of your long-term plan
• Stay focused on your objectives rather than reacting to short-term market downturns

If you are concerned about how the next bear market could affect your portfolio or your retirement plans, speaking with a fiduciary investment adviser may help you evaluate your options and stay disciplined through changing market conditions.

Looking for more insights on staying disciplined in your investment strategy?

• Download Your Guide to Surviving Market Volatility
• Learn the 8 Biggest Mistakes Investors Make
• Get 10 Tips for Navigating Stock Market Bubbles

This article is for informational and educational purposes only and should not be construed as investment advice or a recommendation regarding any particular investment strategy or course of action. The information presented is general in nature and does not take into account the individual circumstances, objectives, or financial situation of any specific investor. We provide our general comments to you based on information we believe to be reliable. There can be no assurances that we will continue to hold this view; and we may change our views at any time based on new information, analysis or reconsideration. Some of the information we have produced for you may have been obtained from a third-party source that is not affiliated with Fisher Investments.

Fisher Investments has no duty or obligation to update the information contained herein.