The coronavirus has caused a recession and, about a month ago, I read that we had officially entered a bear market, and I wondered, what makes a market a bear market and what does it mean?
A bear market is defined as "when the price of an investment falls at least 20% or more from its 52-week high". On March 11, when the Dow Jones Industrial Average fell to be more than 20% lower than its 52-week high, we officially entered a bear market. Other signs of a current bear market are recession, a contracting economy, and high unemployment. Signs of a bear market coming are asset bubbles or investors who are behaving with irrational exuberance.
Bear markets are often caused by a lack of consumer confidence which tips the business cycle into a contraction. In this case, people selling off assets like stocks, in the face of uncertainty, people want to have their cash in hand. This selling off gets others to want to follow suit, due to a fear that they might not be able to get any money out if they wait, meaning they lack confidence in the market to recover.
https://www.thebalance.com/what-is-a-bear-market-difference-from-a-bull-3305814
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In the last paragraph you cover the concept of a panic sell-off. The concept gets more interesting in modern times, though. Not only do high-frequency-trading algorithms mean we can have random panic sells ("flash-crashes") without human intervention[1].
ReplyDeleteAlso, we've created a human (non-mathematical) solution to the human problem of fear/panic-selling: circuit breakers[2]. Like any intervention in free markets, though, there is debate about their efficiency and utility, some of which is discussed in the source below.
[1] https://en.wikipedia.org/wiki/2010_flash_crash
[2] https://www.investopedia.com/terms/c/circuitbreaker.asp