Understanding the concept of a bear market

U.S. stocks exhibited volatility Monday after significant losses last week due to President Donald Trump’s implementation of tariffs on imported goods, which many economists believe will lead to higher prices for American consumers.

President Trump expressed no worry over the sell-off, stating, “sometimes you have to take medicine to fix something,” though investors and the general public are starting to fear a recession following Monday’s fluctuating stock prices coming close to tipping into a “bear market.”

A “bear market” labels a prolonged decline in the stock market, typically after a major index like the S&P 500 dips by 20% or more, according to the U.S. Securities and Exchange Commission (SEC). This sustained downturn must not just be a short fall below 20%.

Bear markets arise due to multiple factors but generally result from pessimism among investors who lose faith in a company’s profitability sustainability. This lack of confidence leads investors to offload their stocks, initiating a chain reaction of sell-offs and contributing to the market’s downturn. In some theories, the term “bear market” derives from how bears attack by swiping downward – in contrast to the upward thrust of bulls, which represent rising stock indexes.

During bear markets, investors often adopt a more cautious approach or redirect their funds elsewhere, such as into bonds. Other investors may seize the opportunity to “buy the dip,” purchasing undervalued stocks in anticipation of future rebounds.

The duration of a “bear market” is uncertain. The most recent bear market, which began in January 2022, lasted for 282 days, according to Charles Schwab. But historically, the average span since WWII is around 18.9 months. Reaching a “breakeven” point following a downturn can typically take 27 months.

President Trump demonstrated no intention of easing his trade war, which has muddied market stability. He asserted on Monday that his economic strategy will lead to “GREATNESS” while also proposing an additional 50% tariff targeting Chinese goods in response to retaliatory tariffs imposed by China.

Leading up to Trump’s declarations on Monday, J.P. Morgan forecasted a recession in the U.S. by the end of 2025. Hedge fund billionaire Bill Ackman, a former Trump supporter, labeled the president’s approach as problematic.

When markets crash, as Ackman noted, new investments decrease, and spending by consumers and businesses slows, leading to layoffs. He urged Trump to reconsider his tariff plan to avoid a potential economic catastrophe.