The term "bear market" gets thrown around a lot these days, but I've noticed there's still confusion about what exactly constitutes one. So let's clear things up.
Technically speaking, a bear market occurs when a major index like the S&P 500 falls 20% or more from its recent peak. By that strict definition, we're not quite there yet – the S&P 500 ($SPX) is down about 17% from its January high. But we're uncomfortably close.
The Nasdaq ($COMPX), however, has already crossed that threshold with a 22% decline from its peak. Tech stocks – especially the smaller, unprofitable growth companies – have taken the brunt of the selling pressure. It's been brutal to watch some former high-flyers lose 50% or more of their value in just a few months.
What makes this potential bear market particularly interesting is how quickly it's arrived after the last one. Historically, bull markets tend to last several years before exhausting themselves. This one might be ending after just two years – unusually short by historical standards.
"I've been investing for over 30 years, and this feels different from previous downturns," says Robert Kessler, a retired financial advisor I spoke with last week. "The speed of information flow and the amount of leverage in the system seems to accelerate everything."
The causes behind our current market stress are multifaceted: trade tensions with China, rising inflation concerns, geopolitical conflicts, and fears of stagflation – that toxic combination of slow growth and rising prices that plagued the 1970s.
What should investors do? History suggests that panic selling during bear markets often leads to regret. The S&P 500 has recovered from every single bear market in its history – though sometimes that recovery takes longer than we'd like.
I've personally been increasing my cash position over the past few months, not out of fear but to have dry powder for opportunities. Quality companies with strong balance sheets and competitive advantages often go on sale during these periods.
Bear markets are painful – there's no sugarcoating it. But they're also a natural part of the investment cycle. Understanding that might not make the red numbers in your portfolio feel any better, but it might help you make more rational decisions during these turbulent times.
