Understanding the Bear Market Cycle: Investment Opportunities from Historical Trends

In the long-term evolution of the capital markets, Bear Markets and Bull Markets alternate like tides, cycling back and forth. Many investors indulge in the thrill of gains during bull markets, but often panic and become helpless when a bear market arrives. In fact, the true test of investment skill occurs precisely during significant asset corrections.

What is a Bear Market? Core Definition in One Sentence

When market asset prices decline more than 20% from recent highs, and this downward trend may last from several months to several years, it enters a Bear Market.

Taking the US stock market in 2022 as an example: the Dow Jones Industrial Average dropped from its high of 36,952.65 points on January 5 to a closing low of 29,260.81 points on September 26, a decline of nearly 21%, officially marking a bear market.

Conversely, when asset prices rebound more than 20% from their lows, it is called a Bull Market.

It is important to note that bear markets are broad—affecting not only stocks but also bonds, real estate, precious metals, commodities, forex, and all other assets with price fluctuations.

Key distinction: Bear markets differ from market corrections. Corrections refer to a 10%-20% pullback from highs, a short-term adjustment that occurs more frequently but lasts for a shorter duration; whereas bear markets represent a longer-term, systemic downturn, with deeper psychological and asset allocation impacts.

When Does a Bear Market Come? Five Major Precursor Signals

1. Price Decline Threshold: Over 20% correction

The U.S. Securities and Exchange Commission clearly states: when major stock indices fall 20% or more within two months, the market is considered to have entered a bear market. This is the most straightforward quantitative standard.

2. Time Pattern: Average cycle about 367 days

Historical data of the S&P 500 shows: in the past 140 years, there have been 19 bear markets, with an average decline of 37.3% and an average duration of 289 days. But there are exceptions—such as the 2020 pandemic-induced bear market, which lasted only 1 month, making it the shortest in history. Usually, indices need to fall about 38% before reversing trend, and it takes several years to recover to previous highs.

3. Concurrent economic recession and rising unemployment

Bear markets often accompany economic downturns, high unemployment, and declining purchasing power. Central banks tend to implement quantitative easing to rescue the market. However, historical experience shows that the rise before QE activation is often just a technical rebound within a bear market, not a true exit.

4. Excessive asset bubbles

Commodity prices often fluctuate far beyond their intrinsic value. Bear markets frequently stem from bubble bursts—when prices are driven too high without buyers, triggering rapid declines. Early stages of economic expansion rarely see bear markets, but when assets peak in a bubble and markets exhibit irrational frenzy, central banks tighten monetary policy to curb inflation, leading to cyclical bear markets.

5. Market sentiment collapse

When market participants become pessimistic about the outlook, consumers cut spending, companies reduce hiring and investment, and profit expectations for companies are downgraded, a combination that can trigger sharp stock price declines.

Fundamental Causes of Past Bear Markets

Collapse of confidence and reversal of expectations

Loss of confidence in economic prospects is the most common trigger. Consumers tighten wallets, companies shrink operations, investors withdraw funds to avoid risk, creating a self-reinforcing negative feedback loop.

Price bubbles and stampede effects

When asset prices deviate significantly from their intrinsic value, initial sell-offs can trigger chain reactions. Panic ensues, accelerating price declines and further undermining confidence.

Geopolitical and financial shocks

Major events such as bank collapses, sovereign debt crises, armed conflicts can trigger market panic. Examples include the Russia-Ukraine war pushing energy prices higher, and US-China trade tensions disrupting supply chains.

Monetary policy tightening

Federal Reserve rate hikes and balance sheet reductions directly decrease market liquidity, suppress corporate and consumer spending, and weigh on stock markets.

External black swan events

Natural disasters, pandemics, energy crises—unpredictable factors can cause sudden global market crashes. The COVID-19 pandemic in 2020 caused a brief but intense bear market shock.

Recent Six US Stock Market Bear Markets

2022: Balance sheet reduction + geopolitical conflicts + supply chain disruptions

Bear market started on January 4, 2022. Post-pandemic global central banks’ aggressive QE led to runaway inflation, coinciding with Russia-Ukraine conflict raising food and oil prices. The Fed was forced to hike rates and shrink its balance sheet to curb inflation. Market confidence collapsed, especially hammering the tech stocks that had surged in the previous two years. The rate hike cycle continues, and the market expects the bear market to last at least until 2023.

2020: Pandemic black swan, shortest bear market

From the Dow peak of 29,568 on February 12 to the low of 18,213 on March 23, it took only 14 days, but then rebounded to 22,552 on March 26 (a rise of over 20%), officially exiting the bear market. This was the shortest bear market in history. Global central banks learned lessons from 2008, quickly implementing QE to stabilize liquidity, rapidly resolving the crisis, and then entering a two-year super bull run.

2008: Subprime crisis, systemic collapse

Fell from October 9, 2007 (14,164.43 points) to March 6, 2009 (6,544.44 points), a decline of 53.4%. Root causes include the dot-com bubble burst in 2000 and 9/11 in 2001, which prompted the Fed to cut rates sharply. Cheap money fueled a housing bubble, and banks repackaged high-risk mortgages into financial products, selling them in layers. When housing prices soared and the Fed began raising rates, investors pulled back, triggering a chain collapse. It took over five years for the Dow to recover to its pre-crisis high on March 5, 2013.

2000: Tech bubble, long bull end

During the 1990s internet boom, many high-tech companies went public without profits, driven by hype. As investors started to withdraw, a stampede effect destroyed valuations, leading to a recession in the following year. The impact was worsened by 9/11 attacks, accelerating stock declines.

1987: Black Monday, 22.62% single-day plunge

On October 19, 1987, the Dow plunged 22.62% in one day. Since 1980, US stocks had been in a prolonged bull market. By 1987, the Fed was raising interest rates, Middle East tensions escalated, and algorithmic trading amplified selling. The government learned from the 1929 Great Depression, quickly cut rates and introduced circuit breakers to halt trading. The market recovered to its high within 14 months, much faster than the decade-long recovery after 1929, showing the market’s improved self-regulation.

1973-1974: Oil crisis and stagflation storm

After the Yom Kippur War, OPEC imposed an oil embargo on supporting Israel, causing oil prices to jump from $3 to $12 per barrel (a 300% increase) within six months. This worsened US inflation, which was already at 8%, leading to stagflation—GDP shrank by 4.7% in 1974 while inflation hit 12.3%. The S&P 500 fell 48%, and the Dow was halved, with a 21-month bear market. It remains one of the deepest and longest systemic collapses in modern US stock history, despite later Fed rate hikes to curb inflation with limited success.

Three Major Investment Strategies During a Bear Market

Defensive Strategy: Cash is king, reduce risk exposure

The top priority in a bear market is survival and profit. Maintain ample cash reserves to weather volatility; reduce leverage; avoid overvalued and overly optimistic assets, as these tend to fall the hardest in a downturn.

Selection Strategy: Focus on defensive assets and oversold quality stocks

If investing is necessary, prioritize counter-cyclical sectors—healthcare, consumer staples—that are less affected by economic swings. Also, monitor oversold high-quality companies; based on historical P/E ranges, buy in tranches when PE hits the low end. These companies should have strong competitive moats to maintain advantages in the next cycle. If individual stock judgment is difficult, consider broad market ETFs to ride the recovery wave.

Tool Strategy: Use derivatives to catch downtrend opportunities

Bear markets have high probability of decline, and shorting can be more successful. Use derivatives like CFDs (Contracts for Difference) to establish short positions. CFDs are contracts based on price differences, not involving physical assets, covering indices, forex, futures, stocks, precious metals, etc., especially suitable for seeking short opportunities in bear markets.

How to Distinguish a Bear Market Rally from a True Reversal?

A bear market rally (trap) is a short-term rebound within a downtrend, usually lasting days to weeks. A rise of over 5% can be considered a rally. It can mislead investors into thinking a bull market has begun, but stock prices won’t move in a straight line. Confirming a true reversal requires several days or months of sustained upward movement, or a single surge exceeding 20% that takes prices out of the bear market range.

Three Key Indicators for Judgment

1. Breadth indicator: Over 90% of stocks trading above their 10-day moving average
2. Advance-Decline ratio: More than 50% of stocks are advancing
3. New Highs ratio: Over 55% of stocks hitting new highs within 20 days

When these indicators align, a new upward cycle can be confirmed.

Summary

A bear market is not the end but an opportunity to reshape asset allocation. The key lies in timely recognition of the signals, and employing appropriate financial tools during the downturn to protect assets and seize opportunities.

For prudent investors, patience and discipline are paramount—adequate cash reserves to handle volatility, strict stop-loss and take-profit rules to protect capital, and a calm mindset to wait for the next recovery. Adjust your mindset, pace yourself, and both bulls and bears present opportunities—provided you survive until the market turns.