To The Moon

What does a bear market mean in 2022? Lower share prices, but still an opportunity to profit.

During 2022, the two most popular terms among investors were "inflation" and "recession". However, most of the attention given to these indicators of economic turmoil seems to revolve around one common theme: the bear market. Generally considered to be a harbinger of bad economic conditions, a bear market tends to scare most investors. And while a bear market often means a significant drop in stock prices, it doesn't necessarily mean a recession is imminent.

In this guide, we'll break down exactly what a bear market is, what it means for the markets, and what investors can do to protect their portfolios right now. We'll also cover the types of investments that often hold up best when a bear market rages.

One basic principle to remember is that bear markets do occur and are normal because stocks and other financial assets do not only move in one direction. They can be even and they can definitely go down. In this context, a bear market is only one of three phases that represent any financial market.

In other words, investors have no reason to panic. Just follow this guide and make sawvy portfolio moves to end up on the right side of the storm!

* Definition of a bear market

The most basic question investors should ask themselves is: What is a bear market?

Simply put, this is the opposite of a bull market, a term used when financial markets are strong and buying is encouraged. The Associated Press provides the following definition:

A bear market is the term Wall Street uses when an index such as the S&P 500, the Dow Jones Industrial Average, or even individual stocks, is down 20% or more from its recent high over a long period of time.

However, it is also important to address another question. Why do we call it a bear market? As noted by InvestorPlace contributor Vandita Jadeja, the terms bull market and bear market derive their names from the ways in which both animals attack their prey. In her words:

When you imagine a bull attacking its prey, you'll notice that its horns usually point upwards, while a bear's head is down. Bulls and bears affect the stock market in the same way. It preys on your investment portfolio and attacks it downwards. Therefore, when this happens, it is called a bear market.

* History of bear markets

For historical context, it's important to remember that we've experienced bear markets before. They often follow major economic events that cause significant disruptions throughout the economy. In March 2020, the start of the Covid-19 pandemic sent the Dow Jones Industrial Average into its first bear market in over a decade. The last bear market before that was the seventeen-month period that ran from 2007 to 2009, when the housing bubble burst.

Before that, investors witnessed one of these in the early 2000s after the dot-com bubble burst. This event caused the S&P 500 to drop by nearly 37% over about 1.5 years.

While these weren't the only bear markets in history, they are the most recent. As InvestorPlace contributor Tim Biggam noted:

Stocks tend to go through bear markets, but since World War Il (WWII) they have been less frequent, with the average time between bear markets being almost six years since 1942. Post-WWII bears were also slightly less unpleasant with an average loss of just over 34%.

* How long do bear markets last?

There is no exact answer, although the average length is 9.6 months. However, investors should note that this is much shorter than the average bull market duration of 2.7 years.

Biggam also provided some historical context regarding the length of the bear market. "The average length of the previous bear market was less than a year at 343 days," he said in July

2022. "The longest bear market was in 1930 and lasted 783 days. The shortest bear market lasted just 32 days and occurred during the Covid-19 crisis in early 2020."

While these numbers don't tell us exactly how long the current bear market will last, they do provide some context for what investors can expect.

* How to protect your portfolio in a bear market

Yes, for anxious investors, there are ways to ensure your portfolio remains protected during a bear market. Much of this strategy focuses on maintaining asset diversification as a means of overcoming market uncertainty. Fortunately, it's not too difficult to line your portfolio with the types of investments that thrive in a bear market.

Trade safely