When comparing bear market vs recession, think of a bear market as the big drop on a rollercoaster, while a recession is more like a prolonged gloomy phase for the entire economy — one where businesses tighten their belts, and things slow down. Each time the United States enters a bear market, investors inevitably wonder if this economic downturn will trigger the next recession.
Understanding the difference between bear market and recession can potentially help investors avoid closing out of their positions prematurely and accepting losses that would have naturally corrected themselves. Read on to learn more about bear markets, recessions and how to invest at each market stage.
Bear market vs recession
Is a bear market a recession? The short answer is no. Bear markets and recessions are two different economic phenomena characterized by falling asset prices, rising unemployment and low consumer confidence. Neither bear markets nor recessions cause one another; instead, they coincide because they share many of the same economic symptoms.
Definition of bear market
A sustained drop in the prices of stocks, bonds, commodities or other financial instruments characterizes a bear market. In a bear market, investor sentiment is generally pessimistic, and there is a widespread expectation of further declines in asset prices. The term often describes a situation where the overall market or a specific asset class experiences a decline of 20% or more from its recent peak.
The opposite of a bear market is a bull market, where asset prices are rising or expected to rise. Bear and bull markets get their names from how these animals attack: a bear swipes its paws downward, representing falling prices, while a bull thrusts its horns upward, representing rising prices.
During a bear market, investors may become more risk-averse, leading to increased selling pressure and reduced buying interest. Economic factors such as high unemployment or negative corporate earnings may contribute to the onset of a bear market.
At this point, you may ask yourself, "Does a bear market mean recession is imminent?" While there are many similarities between a recession vs bear market, the two market phenomena have unique metrics, and one does not lead to the other.
Definition of recession
A recession is a major phenomenon characterized by a significant decline in general economic activity. Recessions are more severe and longer-lasting than bear markets, with broader effects and overall implications. Some factors that economists look at to determine whether or not the United States is currently in a period of recession include a contraction in quarterly GDP growth, consumer spending and retail sales, rising unemployment rates, and declining consumer confidence indexes.
So, what are the main differences between bear market vs recession vs depression?
While a recession can contribute to a bear market, not all bear markets coincide with recessions, as some may be caused by sector-specific issues rather than overall economic conditions. Some investors move their capital into defensive assets to hedge against the possibility of an upcoming recession.
Though a severe and prolonged recession may lead to a depression, the two are unique economic states. Depressions have deeper and longer-lasting declines in economic indicators than recessions. When unemployment rates persist, social systems become overburdened, which may require additional and significant intervention by the central banks or federal government. Thankfully, most recessions do not lead to major depressive episodes and, instead, correct themselves as the market dips.
Examples of bear markets
What happened to the oil market from June 2014 to January 2016 is a great example of a bear market. During this period, the price of Brent crude oil, a global benchmark, peaked at around $115 per barrel starting in June 2014. Oil investors saw this as an opportunity and devoted resources to unearthing Brent crude oil en masse to capitalize on seemingly endless price inflation.
As 2015 arrived, the crude oil bubble burst. A combination of factors, including oversupply due to increased shale oil production, slowing global demand and the Organization of the Petroleum Exporting Countries' (OPEC) decision not to cut production, led to a steep decline in oil prices. Crude oil reached its lowest point during this bear market at around $27 per barrel in January 2016.
Crude oil suppliers like Exxon Mobil NYSE: XOM felt the heat during this bear market and saw share prices plummet.
Examples of recessions
Aptly named, the Great Recession was characterized by a severe bear market, with major banks facing liquidity and solvency issues, causing panic selling and a sharp decline in stock prices. The collapse of the housing market, the subsequent credit crunch and the broader economic fallout contributed to the financial crisis. During this period, many businesses closed, unemployment soared, and the global economy faced a substantial contraction.
The story of the Great Recession began well before the onset of the financial crisis, with major U.S. indexes indicating all-time highs. The Dow Jones Industrial Average (DJIA) reached an all-time high of more than 14,000 points in October of 2007, while the S&P 500 peaked at around 1,565 points before the onset of the bear market.
The global financial crisis in August of 2007 was due to a combination of factors, including the subprime mortgage crisis, Lehman Brothers bankruptcy, and a credit freeze. These events led to widespread panic in the world's financial markets. At its lowest point in 2009, the S&P 500 hit a value of just over 676 points, representing a decline of 57% from the all-time high it saw just a few years prior.
The Great Recession is a significant historical example of how a bear market can coincide with an economic recession, showcasing the interplay between financial markets and the broader economy.
Recovery period start
Global financial crisis
Dot-com bubble burst
Early 1990s Recession
Primarily driven by high oil prices following the Gulf War
Recession of 1981 to 1982
High interest rates combined with rising oil prices
1973 to 1975 recession
Oil crisis resulting from the OPEC oil embargo
Implications for investors
Managing a portfolio during bear markets and recessions requires a thoughtful and strategic approach, especially regarding asset allocation and risk management. Here are some strategies to employ during challenging economic conditions to help you capitalize on opportunities while mitigating potential losses.
- Reassess your financial goals: Ensuring that your investment strategy aligns with your long-term objectives will help you avoid making impulsive decisions based on short-term market fluctuations.
- Diversify your investments: A portfolio that contains a wide variety of asset classes, industries and geographical regions will help spread risk and reduce the impact of a downturn in any specific sector.
- Get defensive: Allocate a portion of your portfolio to defensive sectors such as utilities, healthcare and consumer staple, which tend to be less sensitive to economic downturns.
- Increase your fixed income allocation: Adding more high-quality bonds, Treasury securities and other fixed-income instruments to your portfolio can provide stability and generate income during periods of market volatility.
- Maintain an adequate cash reserve: Having cash on hand allows you to take advantage of investment opportunities that may arise during market downturns and provides liquidity for potential expenses.
- Focus on quality: Companies with solid balance sheets and reliable cash flows may be more resilient during economic challenges.
- Consider dividend stocks: Companies with a history of consistent dividend payments may provide a source of income and stability during market downturns.
- Monitor your portfolio: Regularly review and reassess your holdings, making adjustments based on market conditions, economic indicators and company performance changes.
- Employ risk management techniques: Limit potential losses by setting stop-loss orders on individual holdings, hedging via options or other derivatives and conducting stress tests to see how your portfolio would perform under adverse conditions and to identify potential weaknesses.
- Buy selectively: Capitalize on unique opportunities by identifying, researching and investing in companies undervalued solely due to market downturns.
- Pay attention: Market environments can change quickly, so keeping yourself informed about economic indicators, global events and market trends will help you be prepared when the time comes.
- Avoid timing the market: Accurately predicting market bottoms and tops is challenging, so stick to your long-term investment plan and avoid making impulsive decisions based on short-term market movements.
How bear markets and recessions overlap
While bear markets and recessions might not cause one another, a recession can contribute to a bear market, and conversely, a bear market can contribute to a recession. These two economic phenomena are often interconnected, and their dynamics can reinforce each other.
The biggest way to showcase the overlap of bear markets and recession is to focus on the similar economic conditions that both phenomena share. A bear market and a recession are driven primarily by general economic slowdown. Economic indicators like GDP, employment and consumer spending decline in a recession, which can lead to reduced corporate earnings and lower stock prices and contribute to a bear market.
Both bear markets and recessions lead to negative consumer confidence, which translates to negative investor confidence, as spending and corporate health are intrinsically linked with many corporate health metrics. A significant aspect of the overlap of bear markets and recessions is the "wealth effect," in which consumers tend to spend more as the value of their saved assets rise — and vice versa. In a bear market, investors' wealth can decrease when stock prices decline, which may lead to reduced consumer spending. This drop in spending can further contribute to the economic slowdown associated with a recession.
Financial institutions may face increased stress during a recession due to rising loan defaults and reduced creditworthiness, which can lead to disruptions in the credit markets and a tightening of credit availability. Such financial market instability can exacerbate a bear market by causing widespread panic and selling. In some cases, a severe and prolonged bear market in the stock market can even contribute to the onset of an economic recession, as investors assume that losses are right around the corner.
How to invest in a bear market vs recession
Maintaining a long-term perspective is the key to successful investing during a bear market and a recession. Some investors panic during the onset of a bear market because they assume that bear markets will naturally lead to a recession, which is usually untrue. Panicking can lead to losses investors could have avoided by keeping a more neutral long-term perspective.
Maintaining a diversified portfolio across various asset classes to reduce risk during a bear market. Diversification can help cushion the impact of market declines in specific sectors, which can help contain losses. Bear markets can be short-term corrections within a broader upward trend, so avoid making hasty decisions based on short-term market volatility.
If a recession does hit, you'll want to focus primarily on capital preservation. Recessions can lead to prolonged economic challenges, so prioritize capital preservation by putting money into tried-and-tested assets like major index funds or high-quality, stable businesses with a successful history of weathering economic downturns. Companies with strong balance sheets, solid cash flow and competitive advantages are more likely to survive negative periods.
Navigating through economic uncertainties
Investing during turbulent market conditions can test your psychological resilience. Heightened volatility, uncertainty and the fear of financial loss can result in emotional and impulsive decision-making. When this happens, seeking professional advice becomes paramount. Financial advisors can provide valuable insights, helping you navigate market turbulence with a disciplined approach tailored to your goals and risk tolerance.
In addition, staying informed about macroeconomic trends is essential for making smart decisions. It helps you separate noise from fundamental shifts, contextualizing short-term market fluctuations. Understanding the broader economic landscape also enables you to position your portfolios strategically and seize opportunities amid challenges.
Is your portfolio prepared for the bear?
The good news about both bear markets and recessions is that no matter how severe they seem, periods of economic slowdown don't last forever. The key to investing through a bear market or a recession is to maintain a diversified portfolio, putting your capital into companies you have researched and believe have the fundamentals to make it through a full economic cycle. While bear markets and recessions can feel scary, they may also present once-in-a-lifetime opportunities to add undervalued assets to your portfolio.
Now that you understand a correction vs bear market vs recession, you can begin investing with the future of the U.S. economy in mind.
Let’s review a few of investors' most common questions about how bear markets and recessions coincide.
Does a recession mean a bear market?
While recessions can contribute to bear markets by impacting corporate profits and investor sentiment, stock markets can experience declines without an officially declared recession. Conversely, economic contractions don't always lead to bear markets. Although recessions and bear markets often coincide, they are not synonymous nor does one cause another.
Do bear markets end before recession?
Since the timing of market recoveries and economic indicators may not perfectly align, bear markets can end before a recession concludes, but they don't have to. Investors sometimes witness a market upturn before the broader economy fully emerges from a downturn — another reason it's important to distinguish between market cycles and economic cycles.
It's not uncommon for stock markets to rebound based on anticipations of recovery, even if certain economic indicators still suggest ongoing recessionary conditions.
How long do bear markets with recessions last?
There is no fixed timeline on the length of a bear market with a recession as it depends on various factors, including the economic downturn's severity, the effectiveness of policy responses and the nature of the underlying issues causing the market decline.
Government interventions, fiscal stimulus and monetary policy measures all influence the duration and intensity of the economic contraction and the corresponding market downturn. As such, predicting how long a bear market with a recession will last is very difficult. Still, historically, these periods have lasted anywhere from several months to a couple of years.