If you’ve been following stock market news in 2022, you’ve probably heard that we’re nearing bear market territory. A bear market is a prolonged drop in the stock market of 20% or more.
Bear markets may seem terrifying, particularly if you monitor your retirement accounts and other investments daily. But bear markets tend to be short, and they’re actually quite common. If you take a few steps to prepare, those falling stock prices can actually present opportunities to you as an investor.
Keep reading to learn how bear markets work, what causes them, and how to prepare if you’re worried a bear market is ahead.
What Is a Bear Market?
A bear market is a sustained decline of at least 20% in stock prices or other securities prices. A stock market correction is similar, but less severe. When stock prices drop by more than 10% but less than 20%, it’s considered a stock market correction. Commonly, these thresholds are calculated using a major stock index as a benchmark, like the S&P 500 index, the Nasdaq Composite index or the Dow Jones Industrial Average.
As of this writing in mid-June 2022, the S&P 500 index — which represents about 80% of the US overall stock market — was right around bear market turf, having fallen about 20% from its all-time high in early January. But the tech-heavy Nasdaq Composite Index has been in bear market territory since March, when its value tumbled 20% below its November 2021 peak.
When stocks tumble below 20% of their record highs, it’s typically big news. But it’s important to remember that there’s nothing particularly significant about that number. So there’s no reason to panic just because we officially crossed into a bear market.
The opposite of a bear market is a bull market. A bull market is a sustained period of rising stock prices and high investor confidence. A new bull market begins when stock prices rise by 20% or more from their recent lows.
Bull and bear markets are both normal…